H6 

1551 
H85 
XX 


THE 


EVOLUTION 


ROBERT  H. 


->  ■  »      1  \  I 

UNIVEKSIiY  OF 
CAL1I-0..,MA 

SAN  DiL'GO 
-^ 


THE 

Evolution  of  Banking 


A  STUDY  OF  THE  DEVELOPMENT 
OF  THE  CREDIT  SYSTEM 


BY 

ROBERT  H.  HOWE 


CHICAGO 

CHARLES  H.  KERR  &  COMPANY 

CO-OPERATIVE 


Copyright  1915 
By  Robert  H.  Howe 


JOHN    F.  HIGGINS 

PRINTER  AND   BINDER 


376-382    MONROE  STREET 
CHICAGO.     ILLINOIS 


DEDICATED  TO  THE  MEMORY 

OF 

HENRY   DEMAREST  LLOYD 


Foreword 


It  is  needless  to  say  that  this  book  does  not 
contain  all  that  might  be  written  on  the  subject 
of  money;  many  interesting  and  instructive 
phases  of  the  subject  have  not  been  treated 
at  all,  for  the  reason  that  few  people  will  read 
a  bulky  volume,  and  many  cannot  pay  the  cost 
of  one.  It  is  published  with  the  sole  purpose 
in  view  of  stimulating  thought  and  inquiry  into 
the  subject  of  which  it  treats  and  which  has 
been  nearly,  if  not  entirely,  neglected  by  the 
leaders  of  advanced  thought. 

There  is  growing  up  in  America  a  strong  de- 
mand to  substitute  collective  ownership  and 
operation  of  certain  industries  in  place  of  cor- 
poration ownership  and  operation.  This  is 
evidenced  by  the  recent  passage  in  various 
states  of  Public  Utilities  Acts  which  empower 
the  cities  and  villages  to  purchase  or  construct 
water  works,  electric  light  and  power  plants, 
traction  systems,  pipe  lines  for  the  distribution 
of  gas,  oil,  heat  or  cold ;  warehouses  for  storage 
purposes,  wharfs,  etc.,  and  empowering  the 
cities  to  issue  bonds  or  certificates  of  indebted- 
ness which  are  to  be  a  lien  on  the  property 
5 


FOREWORD 


built  or  purchased  and  which  are  redeemable 
out  of  the  operating  income. 

These  enabling  acts  will  certainly  be  taken 
advantage  of  in  the  near  future.  The  present 
Public  Utilities  owned  by  private  interests  and 
operating  under  franchises  are  staggering 
under  a  burden  of  stocks  and  bonds  far  beyond 
the  value  of  their  properties,  and  in  many  cases 
double  the  cost  of  reproduction. 

In  taking  over  these  various  activities  an 
attempt  will  certainly  be  made  to  unload  this 
mass  of  indebtedness,  a  large  percentage  of 
which  is  fictitious,  upon  the  public  at  par,  and 
issue  in  place  thereof  twenty  or  twenty-five 
year  Public  Utility  Bonds  or  Certificates  bear- 
ing 4  per  cent  or  5  per  cent  interest.  This 
would  place  upon  the  public  a  burden  of  debt 
for  principal  and  interest  far  in  excess  of  the 
value  of  the  property  taken.  Under  the  pres- 
ent laws  it  is  not  possible  to  take  over  these 
properties  or  build  others  without  issuing  in- 
terest-bearing obligations  which  will  make  the 
cost  to  the  public  from  two  to  four  times  the 
value  received. 

If  Congress  would  enact  into  legislation  the 
Currency  Bill  found  at  the  close  of  this  volume, 
cities  could  take  possession  of  these  public 
utility  properties  and  pay  no  more  than  their 


FOREWORD 


actual  value  and  never  be  obliged  to  pay  one 
cent  of  interest. 

Currency  is  a  tool  which  man  invented  for 
use  where  there  was  an  unequal  exchange  of 
services  or  commodities. 

Under  a  system  of  barter  where  each  ex- 
change was  a  complete  and  closed  transaction 
money  was  unknown  and  unneeded.  The  fol- 
lowing quotation  from  Homer's  Illiad  depicts 
a  state  where  no  money  was  used : 

"From  Lemnos  Isle  a  numerous  fleet  had  come 
Freighted  with  wine       *       *       *       # 
*       *       *       *       all  the  other  Greeks 
Hastened   to   purchase,   some   with   brass   and 

some 
With  gleaming  iron ;  some  with  hides 
Cattle  or  slaves." 

But  where  there  was  an  unequal  exchange  of 
services  or  commodities  between  two  persons 
there  would  be  the  difference  in  the  amount  due 
from  one  to  the  other  and  some  evidence  or  token 
would  be  required  by  the  creditor  from  the 
debtor. 

In  writing  of  this  subject  Aristotle  said : 

"But  with  regard  to  a  future  exchange  (if 


FOREWORD 


we  want  nothing  at  present,  that  it  may  take 
place  when  we  do  want  something)  money  is, 
as  it  were,  our  security,  for  it  is  necessary  that 
he  who  brings  it  should  be  able  to  get  what  he 
wants." 

To  instance  this  in  a  simple  manner  let  us 
picture  a  shoemaker  living  in  a  house  built  on 
a  low,  wet  piece  of  ground  which  he  desires 
drained.  He  employs  a  neighbor  to  dig  a  ditch 
that  will  carry  off  the  surplus  water.  While 
the  ditch  is  being  dug  the  shoemaker  makes  a 
pair  of  shoes,  and  offers  them  to  the  ditch  dig- 
ger as  compensation  for  his  work.  He  refuses 
the  shoes  because  he  has  a  good  pair,  but  ac- 
cepts the  shoemaker's  I.  0.  U.  The  ditch  dig- 
ger, however,  needs  a  coat  and  a  tailor  who 
knows  the  shoemaker  accepts  the  evidence  of 
his  debt  in  payment  for  the  coat.  The  tailor 
in  turn  wants  the  roof  of  his  house  mended  and 
employs  a  carpenter  to  do  the  work  and  trans- 
fers to  him  in  payment  for  it  the  shoemaker's 
I.  0.  U.  The  carpenter  needing  a  pair  of  shoes 
gets  a  pair  from  the  shoemaker  and  pays  for 
them  by  surrendering  the  evidence  of  the  debt 
which  the  shoemaker  originally  owed  to  the 
ditch  digger,  and  the  shoemaker  destroys  it. 

It  will  thus  be  seen  that  the  debt  contracted 
by  the  shoemaker  was  the  basis  for  the  cur- 


FOREWORD 


rency  by  means  of  which  the  services  of  the 
ditch  digger,  the  tailor,  the  carpenter  and  the 
shoemaker  were  exchanged,  and  when  the  debt 
was  paid  the  currency  disappeared.  It  shows 
also  that  where  there  is  no  debt  there  can  be  no 
currency. 

McLeod,  in  his  Theory  and  Practice  of  Bank- 
ing, says:  "This  currency  is  nothing  more 
than  the  evidence  of  service  having  been  ren- 
dered for  which  an  equivalent  has  not  been 
received,  but  which  may  at  any  time  be  de- 
manded. It  is  obvious  that  as  soon  as  it  has 
been  rendered,  the  evidence  of  its  being  due 
must  be  given  up  to  the  debtor  to  be  destroyed, 
and  it  will  be  no  longer  current.  And  if  any 
man  can  render  services  to  his  neighbors,  he 
must  in  return  receive  either  other  services,  or 
the  evidence  of  their  being  due ;  and  if  he  ren- 
ders more  services  than  he  immediately  re- 
quires in  return,  he  will  accumulate  a  store  of 
this  evidence  for  his  future  wants. 

"These  simple  considerations  at  once  show 
the  fundamental  nature  of  a  currency.  It  is 
quite  clear  that  its  use  is  to  measure  and  record 
debts,  and  to  facilitate  their  transfer  from  one 
person  to  another;  and  whatever  means  be 
adopted  for  this  purpose,  whether  it  be  gold, 
silver,  paper,  or  anything  else,  is  a  currency. 


10  FOREWORD 


We  may,  therefore,  lay  down  as  our  funda- 
mental conception  that  CURRENCY  AND 
TRANSFERRABLE  DEBT  are  convertible 
terms;  whatever  represents  transferrable  debt 
of  any  sort  is  CURRENCY,  and  whatever  ma- 
terial the  currency  may  consist  of,  it  repre- 
sents transferrable  debt  and  nothing  else. ' ' 


CONTENTS 

Introduction  13 

English  Tallies 16 

Modern  Banking 19 

The  Introduction  of  Bank  Checks 22 

The  Cause  of  Bank  Panics 31 

The  Bank  of  Venice 37 

The  Story  of  the  Guernsey  Market 50 

Opposition  by  Private  Bankers 60 

Henry  D.  Lloyd  on  the  Guernsey  Financial 
Plan   69 

French  Assignats 79 

State  Banks  in  America 96 

Condition  of  American  Banks 101 

The  Bank  of  the  State  of  South  Carolina  . . .  108 

The  State  Bank  of  Illinois 119 

State  Bank  Issues  in  Michigan 129 

Demonetization  of  the  Silver  Dollar  in  1873 . .  139 

The  Federal  Reserve  Bank 149 

The  Fluctuating  Value  of  Gold 159 

Henry  D.  Lloyd  on  Money 165 

Conclusion  174 


The  Evolution  of  Banking 


INTRODUCTION 

The  most  important  factor  in  civilized  life  is 
the  production  and  exchange  of  commodities. 
The  creation  and  distribution  of  the  wealth 
necessary  for  the  support  and  comfort  of  the 
human  family  is  the  main  object  of  all  industry. 
Money  and  its  modern  substitute,  Bank  Credit, 
are  agencies  by  which  this  industry  and 
commerce  is  carried  on;  but  we  must  not,  in 
considering  the  subject,  be  blinded  by  the  in- 
tervention of  Money  and  Bank  Credit,  and  fail 
to  maintain  a  clear  distinction  between  the 
main  object  and  the  agency  by  means  of  which 
we  attain  the  desired  end.  Neither  must  we 
delude  ourselves  into  thinking  that  Money, 
Banks  and  Bank  Credit  are  the  only  agencies 
by  which  men  can  exchange  wealth. 

Bank  Panics  occur  which  result  in  nearly  a 
complete  stoppage  of  industry.  We  have  all 
the  physical  elements  for  the  production  of  the 
wealth  that  is  needed  to  satisfy  human  wants. 
Yet  hundreds  of  thousands  of  willing  workers, 
both  skilled  and  unskilled,  are  thrown  out  of 
13 


14  THE   EVOLUTION    OF   BANKING 

work  almost  over  night.  If  idle  factories,  idle 
land,  and  idle  men  are  the  inevitable  result  of 
the  modern  financial  system,  it  is  the  duty  of 
all  to  investigate  the  Banking  and  Money  ques- 
tion, and  substitute  a  saner,  more  reliable,  and 
less  expensive  system  than  the  present  one. 

The  modern  banking  system  has  grown  up 
and  developed  along  with  the  modern  indus- 
trial system.  Though  the  two  are  inseparably 
linked,  the  Banking  system  must  be  considered 
as  merely  an  adjunct  to  the  commercial  sys- 
tem. 

At  the  dawn  of  history,  when  mankind  was 
emerging  from  savagery,  commodities  were 
produced  by  hand  labor  and  exchanged  by 
means  of  barter.  Human  needs  were  few  and 
simple,  and  were  easily  satisfied. 

To-day,  commodities  are  almost  entirely  the 
result  of  machine  labor.  Human  needs  have 
multiplied  and  are  supplied  by  a  worldwide 
commerce.  But  no  matter  how  complex  the 
modern  commercial  system  seems,  the  same  fact 
persists,  and  has  persisted  through  the  sweep 
of  the  centuries,  that  we  still  carry  on  a  system 
of  exchanging  goods  for  other  goods.  Pro- 
ducers do  not  now  meet  face  to  face,  as  they 
once  did,  and  exchange  their  product  by  direct 
barter,  but  still  the  products  of  the  rural  dis- 


THE  EVOLUTION   OF   BANKING  15 

tricts  pay  for  the  products  of  the  manufactur- 
ing districts.  The  same  is  true  of  the  nations — 
our  exports  pay  for  our  imports.  But  this 
inter-social  exchange  of  commodities  could  not 
have  grown  to  its  present  immense  proportions 
had  not  some  means  been  invented  to  facilitate 
commerce. 

In  the  hunting  stage  skins,  and  later,  in  the 
pastoral  stage,  cattle  were  used  as  the  Unit  of 
Calculation,  by  means  of  which  values  were 
expressed  and  goods  exchanged.  Later,  a  vast 
array  of  agricultural  products  and  metals  were 
used  as  the  basis  for  the  exchange  of  commodi- 
ties. They  all  served  their  purpose  at  the  time 
and  place  where  they  were  used,  but  were  dis- 
carded from  time  to  time,  and  better  mediums 
substituted :  Cattle  were  eliminated  because  of 
the  differences  in  the  age  and  condition  of  dif- 
ferent members  of  the  same  flock,  and  also  on 
account  of  their  liability  to  death  and  disease ; 
agricultural  products  decayed  and  became 
worthless;  metals  used  as  coins  went  through 
the  same  process  of  elimination ;  iron  was  used, 
but  was  too  cheap  and  liable  to  rust ;  lead  was 
too  soft  to  long  retain  the  impression  of  the 
mint,  etc.  But,  however  interesting  and  in- 
structive this  subject  is,  space  does  not  permit 
of  a  history  here. 


16  THE   EVOLUTION   OF  BANKING 

ENGLISH  TALLIES 

One  of  the  most  interesting  instances  of  the 
use  of  representative  money  is  found  in  the 
English  Exchequer  Tallies  which  circulated  in 
England  for  over  six  hundred  years.  These 
were  adopted  as  a  means  of  financing  the  Eng- 
lish Treasury  by  the  fourth  son  of  AVilliam  the 
Conqueror,  who  ascended  the  throne  as  Henry 
I  in  the  year  1100.  The  tallies  were  of  wood 
and  were  issued  by  Royal  Warrant.  All  who 
served  the  King  or  State  were  paid  with  them. 
Supplies  for  the  Royal  Household  and  army 
were  purchased  with  them  and  they  circulated 
among  the  people  as  money  and  were  used  as 
such  in  the  exchanging  of  commodities.  They 
were  four  sided  rods  of  hazel  or  linden  wood 
about  an  inch  in  diameter.  The  amount  due 
from  the  State  to  the  creditor  was  designated 
by  notches  cut  into  one  of  the  flat  sides  of  the 
rod.  £1,000  was  represented  by  a  notch  as 
broad  as  the  palm  of  the  hand;  £100  by  the 
breadth  of  the  thumb ;  £20  by  the  thickness  of 
the  little  finger;  £1  by  that  of  a  barley-corn; 
for  a  shilling  the  least  piece  possible  was  cut 
out ;  and  a  penny  merely  by  an  incision  without 
any  wood  being  taken  away.  The  amount  was 
also  written  in  ink  on  two  opposite  sides.    The 


THE  EVOLUTION   OF  BANKING  17 

rod  was  then  split  by  knife  and  mallet  length- 
wise through  the  notches.  One-half  of  the 
stick,  showing  the  inscription  in  ink  and  one- 
half  of  the  notches  was  given  to  the  creditor 
and  one-half  was  placed  in  the  treasury.  They 
circulated  throughout  the  Kingdom  as  money 
and  the  merchants  and  others  used  them  in  all 
business  transactions.  They  did  not  pretend  to 
be  based  on  gold  or  silver.  They  were  re- 
deemed by  the  Government  only  by  being  ac- 
cepted in  the  payment  of  taxes.  When  the  time 
came  for  the  collection  of  taxes  the  Sheriff  of 
the  County  by  proclamation  called  all  who  had 
exchequer  tallies  to  present  them  and  obtain 
allowance  for  them.  They  were  matched  with 
the  counter  tallies  and  where  the  two  edges 
fitted  into  each  other  they  were  said  to  ** tally." 

After  being  accepted  in  payment  of  taxes 
they  were  broken  in  half  and  thus  cancelled. 

When  the  Bank  of  England  was  established 
in  1694  there  was  about  £14,000,000  ($70,000,- 
000)  in  wooden  tallies  in  circulation  in  Eng- 
land. The  Bank  enjoyed  the  privilege  of 
issuing  paper  currency  for  the  first  time  in 
England,  although  it  had  been  used  in  China 
several  hundred  years  previously. 

To  Sweden,  however,  belongs  the  credit  of 
first  introducing  paper  bank  notes  in  Europe. 


18  THE  EVOLUTION   OF  BANKING 

The  money  of  Sweden  consisted  of  large  plates 
of  pure  copper,  %  of  an  inch  thick,  and  was 
very  inconvenient  to  handle  in  large  business 
transactions.  The  two-daler  piece  was  7^^ 
inches  square  and  weighed  3i/^  pounds.  A  mer- 
chant on  a  collecting  tour  was  obliged  to  take 
a  wheelbarrow  or  cart  to  bring  his  money 
home.  To  remedy  this  inconvenience  a  Bank 
of  deposit  was  established  at  Stockholm  and 
the  copper  money  was  deposited  and  bank 
notes  given  in  exchange  for  it.  These  bank 
notes  were  used  all  through  the  country  in 
making  payments. 

The  Bank  of  England  did  not  at  first  issue 
notes  for  a  less  amount  than  £20  ($100)  and 
these  were  of  little  use  for  general  business 
purposes,  so  the  Chancellor  of  the  Exchequer 
began  the  issue  of  £5  and  £10  exchequer  bills. 
The  use  of  the  paper  bank  notes  and  the  ex- 
chequer bills  gradually  displaced  the  wooden 
tallies  in  the  more  important  business  trans- 
actions, but  it  was  not  until  1783  that  their  use 
was  abolished  by  act  of  parliament.  In  spite 
of  this  act  their  use  was  not  finally  abandoned 
by  the  government  until  1826.  Four  years 
later  the  heaps  of  them  which  had  been  ac- 
cumulating for  centuries  were  ordered  burned 
in  the  furnaces  of  the  Houses  of  Parliament.    A 


THE   EVOLUTION   OF   BANKING  19 

defective  or  overheated  flue  started  a  conflagra- 
tion which  completely  destroyed  the  buildings. 

There  is  still  preserved  in  the  British  Mu- 
seum a  tally  which  looks  like  a  huge  wooden 
sabre.  It  was  given  by  the  British  government 
to  the  East  India  Company  as  security  for  a 
loan  of  £25,000  ($125,000).  The  loan  was 
afterwards  repaid. 

In  1C97,  when  the  capital  of  the  Bank  of 
England  was  increased  by  a  new  subscription 
of  £1,000,000  ($5,000,000),  eight  hundred  thou- 
sand pounds,  or  four  million  dollars,  of  the 
stock  was  paid  for  with  wooden  tallies  at  par. 


MODERN  BANKING 

Modern  banking  can  be  said  to  have  had  its 
origin  with  the  establishment  of  the  Bank  of 
England  in  1694,  and  the  Bank  of  Scotland 
in  1695. 

Previous  to  that  date  the  Banks,  such  as  The 
Bank  of  Venice  (1191-1797),  Bank  of  Genoa 
(1407-1797),  Bank  of  Hamburg  (1619),  Bank  of 
Stockholm  (1668-1754),  and  the  Bank  of  Am- 
sterdam (1609-1790)  were  Banks  of  Deposit. 
Payments  in  business  transactions  during  the 
medieval  period  were  made  by  means  of  coins, 


20  THE   EVOLUTION   OF   BANKING 

but  the  inconvenience  of  handling  and  storing 
a  large  number  of  coins,  vrith  the  risk  of  loss 
through  overvalued  or  debased  coins  and  the 
risk  of  theft,  led  to  the  establishment  of  these 
Banks  of  Deposit,  where  the  coins  were  valued 
for  once  and  all  and  were  then  locked  up  in 
the  bank  vaults  and  never  withdrawn,  but  the 
title  to  the  same  was  transferred  on  the  Books 
of  the  Banks.  This  is  in  effect  what  the  United 
States  Treasury  is  doing  at  the  present  time 
when  it  issues  gold  and  silver  certificates  to  any- 
one who  deposits  gold  and  silver  coins  or  bul- 
lion in  the  Treasury.  The  Banks  of  Deposit 
made  no  loans,  but  their  income  was  derived 
from  a  charge  that  was  made  for  each  transfer 
of  funds  on  the  books  of  the  Bank. 

Our  modern  banks  are  Banks  of  Discount  as 
distinguished  from  their  predecessors,  the 
Banks  of  Deposit,  and  have  given  an  enormous 
impetus  to  commerce.  They  have  been  able  to 
do  this  because  they  can  and  do  create  credit 
that  circulates  the  same  as  money  and  in  a  far 
more  convenient,  safe  and  economical  form. 

At  the  beginning  of  the  banking  era  the  pres- 
ence or  absence  of  banking  facilities  were  of 
little  or  no  importance  to  the  working  class, 
but  these  facilities  were  utilized  by  the  mer- 
chant or  trading  class. 


THE   EVOLUTION   OF   BANKING  21 

The  merchant  was  able  to  purchase  goods 
from,  the  producers  in  an  amount  far  exceeding 
his  capital  because  he  could  give  to  the  Bank 
his  note  payable  three  or  four  months  later, 
and  receive  Bank  Notes  for  the  amount  of  his 
note  less  the  interest. 

These  Bank  Notes  circulated  the  same  as 
coins.  They  paid  for  goods  and  discharged  all 
kinds  of  financial  obligations  equally  as  vrell 
as  gold,  and  were  far  more  convenient  to  han- 
dle. They  were  redeemable  in  coin  (Gold  or 
Silver)  on  demand,  but  the  bank  maintained 
only  a  small  reserve  in  gold  for  redemption 
purposes.  This  led  to  a  suspension  of  specie 
payments  by  the  Bank  of  England  twice  in  its 
career,  the  most  important  one  continuing  for 
twenty-five  years — 1797  to  1822 — but  the  busi- 
ness of  England,  and  of  the  Bank,  continued 
just  the  same. 

Private  Banks  were  established,  but  could 
loan  only  their  own  or  customers '  capital.  They 
could  not  loan  their  credit  like  the  Bank  of 
England,  as  the  latter,  by  its  charter,  had  a 
monopoly  of  the  issue  of  Bank  Notes. 


22  THE   EVOLUTION   OF   BANKING 


THE  INTRODUCTION  OF 
BANK  CHECKS 


About  the  year  1780  the  London  Bankers 
introduced  a  simple  and  apparently  unimpor- 
tant change  in  their  methods  of  transacting 
their  business,  which  destroyed  the  monop- 
oly of  the  Bank  of  England.  Instead  of  giving 
their  promissory  notes  or  deposit  receipts,  they 
entered  on  their  ledgers  the  amount  due  their 
customers  and  gave  them  books  of  blank  forms 
called  checks.  This  method  enabled  the  Bank- 
ers to  create  a  currency  not  contemplated  by 
the  framers  of  the  Bank  Act.  When  the  Bank 
of  England  discovered  it,  they  appealed  to 
Parliament  to  stop  it,  but  they  were  told  such 
monopolies  were  out  of  fashion  and  their  de- 
mand was  refused. 

The  Banks  that  began  to  be  established  in 
the  United  States  about  the  year  1800  followed 
exactly  the  English  methods.  They  received 
their  charters  from  the  various  States.  These 
charters  gave  them  the  right  to  accept  deposits 


THE   EVOLUTION    OP   BANKING  23 

and  to  discount  notes  for  merchants  and  others 
and  granted  them  the  privilege  of  issuing  their 
circulating  notes  to  the  amount  of  tvro,  two 
and  one-half,  and  in  some  cases  three  times  the 
amount  of  their  paid-up  capital.  These  notes 
were  redeemable  on  demand  in  coin  (Gold  and 
Silver),  just  as  the  Bank  of  England's  notes 
were,  and  a  reserve  was  to  be  maintained  in 
the  vault  of  the  bank  to  the  extent  of  from  25 
per  cent  to  33  per  cent  of  the  bank 's  notes  that 
were  in  circulation. 

At  first  the  liabilities  of  the  banks  for 
notes  in  circulation  far  exceeded  the  liabilities 
under  the  head  of  Deposits ;  but,  as  the  use  of 
bank  checks  in  place  of  currency  grew,  the 
ratio  changed  and  has  resulted  in  the  present 
condition,  where  the  circulation  liability  of  the 
National  Banks  is  about  $750,000,000— while 
the  liability  to  depositors  is  upwards  of  $15,- 
000,000,000.  A  most  profoundly  erroneous 
impression  is  made  on  the  mind  of  the  public 
by  the  published  statements  of  the  amount  of 
liabilities  of  the  banks  under  the  head  of  ''De- 
posits." It  is  almost,  if  not  quite,  universally 
believed  that  the  so-called  deposits  are  deposits 
in  actual  cash,  while  the  truth  is,  in  so  far  as 
the  deposits  exceed  the  cash  on  hand,  they  are 
the  proceeds  of  discounted  commercial  paper. 


24  THE  EVOLUTION   OF  BANKING 

Banks  do  not  loan  money.  They  loan  credit. 
They  create  this  credit  and  charge  interest  for 
the  use  of  it.  It  is  universally  admitted  that 
the  old  State  Banks  that  created  credit  in  the 
form  of  bank  notes,  created  currency — and  our 
modern  system  of  creating  credit  in  the  form  of 
"Deposits"  which  circulate  in  the  form  of 
bank  checks,  is  doing  exactly  the  same  thing — 
creating  currency. 

All  this  in  effect  nullifies  the  National  Bank- 
ing Act,  which  provides  for  National  Bank 
Currency  based  on  U.  S.  Government  Bonds, 
and  also  the  act  levying  an  annual  tax  of  10 
per  cent  on  all  State  Bank  Currency. 

As  the  Banks  of  the  United  States,  as  a 
whole,  have  a  reserve  fund  in  cash  of  only 
about  10  per  cent  against  their  deposit  liabili- 
ties, it  is  evident  that  90  per  cent  of  the  de- 
posits that  are  our  real  circulating  medium  is 
based  on  the  real  circulating  capital  of  the 
country;  i.  e.,  the  wheat,  corn,  oats,  cotton, 
wool,  iron,  coal,  sugar,  linen,  lumber,  hides, 
leather,  carpets,  furniture,  shoes,  clothing,  and 
other  commodities  that  are  in  the  process  of 
exchange.  In  other  words,  the  banks  are  coin- 
ing all  classes  of  commodities  into  money. 

The  public  little  realizes  to  what  an  extent 
Bank  Credit,  circulating  in  the  form  of  bank 


THE   EVOLUTION    OF   BANKING  25 

checks,  has  supplanted  all  other  circulating 
media.  In  95  per  cent  of  all  the  business  done 
in  the  United  States,  the  payments  are  made 
in  bank  checks  and  in  only  5  per  cent  is  any 
cash  used;  and  of  this  5  per  cent  an  infinites- 
imal fraction  only  is  gold. 

The  introduction  of  bank  notes  was  useful  in 
weaning  the  public  from  the  use  of  gold  and 
silver  coins,  and  prepared  the  way  for  the  in- 
troduction of  Bank  Credit  as  the  means  of  pay- 
ment for  commodities.  As  a  result  of  this  evo- 
lutionary process,  the  checks  drawn  and  paid 
in  the  United  States  amount  to  between  two 
hundred  billion  and  two  hundred  and  fifty  bil- 
lion dollars  a  year. 

It  is  clear  that  it  would  be  a  physical  impos- 
sibility to  do  this  amount  of  business  by  the 
use  of  gold  coin.  There  is  only  about  eight 
billions  of  gold  money  in  the  world,  of  which 
amount  less  than  two  billions  of  dollars  are  in 
the  United  States. 

The  banks  have  created  fifteen  billions  of 
dollars  of  credit  by  discounting  the  notes  of 
merchants  and  manufacturers,  and  crediting 
the  proceeds  to  the  borrower's  account  under 
the  head  of  Deposits.  As  a  result,  the  bor- 
rower is  enabled  to  draw  checks  and  pay  his 
debts  with  them.     The  credit  thus  started  on 


26  THE    EVOLUTION    OF    BANKING 

its  journey  flows  through  the  channels  of  com- 
merce, paying  all  manner  of  monetary  obliga- 
tions as  efficaciously  as  though  done  with 
gold.  The  merchant  draws  his  check  for  the 
exact  amount  of  each  account  he  wishes  to  pay. 
He  makes  the  checks  payable  to  his  creditors' 
order  and  sends  them  through  the  mail  without 
risk  of  loss.  The  recipients  of  the  checks  de- 
posit them  to  their  credit  in  the  bank  and  start 
their  checks  out  on  the  same  debt  paying  er- 
rand. The  credit  first  extended  to  the  mer- 
chant in  the  course  of  the  three  or  four  months 
that  it  is  in  existence,  is  the  means  of  paying 
debts  to  the  amount  of  ten  or  twenty  times  the 
amount  originally  borrowed.  The  borrower, 
meanwhile,  is  constantly  increasing  the  amount 
to  his  credit  in  the  bank  by  depositing  his  re- 
ceipts from  the  sale  of  his  merchandise,  and 
when  the  note  falls  due,  he  gives  his  check  for 
the  note,  and  the  debt  and  the  credit — which 
are  counterparts  of  each  other — are  by  this 
means  offset  and  both  disappear. 

Up  to  the  present,  nothing  has  been  said  of 
the  possible  interest  the  wage  worker,  who  is 
without  property  or  industrial  capital,  has  in 
the  subject  of  Banking  and  Bank  Credit. 

As  has  been  said  in  a  previous  paragraph,  at 
the  beginning  the  facilities  offered  by  a  bank 


THE  EVOLUTION    OF   BANKING  27 

were  utilized  by  the  merchant  or  trading  class. 
Production,  at  that  time,  was  carried  on  al- 
most exclusively  by  independent  workmen  who 
owned  the  tools  with  which  they  worked.  But 
the  invention  of  the  steam  engine,  and  the  rise 
of  the  factory  system,  separated  the  self-em- 
ploying workmen  from  their  tools,  which  had 
become  useless,  and  forced  them  into  the  fac- 
tories as  wage  workers.  Their  labor  power  be- 
came a  commodity  to  be  bought  just  the  same  as 
coal,  or  oil,  or  any  raw  material  necessary  in 
the  manufacture  of  goods.  Under  our  modern 
industrial  system,  with  its  world-wide  markets, 
the  manufacturers  are  absolutely  dependent  on 
their  ability  to  secure  credit  from  the  banks 
to  carry  on  their  business.  Just  as  far  as  their 
ability  to  secure  credit  is  curtailed  or  ceases, 
their  ability  to  employ  labor  and  purchase  raw 
material  is  curtailed  or  ceases.  Financial  pan- 
ics have  occurred  in  the  past;  w^e  are  in  the 
midst  of  one  now ;  and  they  will  keep  on  occur- 
ring as  long  as  the  present  industrial  and 
financial  system  continues.  While  the  wage- 
worker  has  no  business  dealings  with  a  bank, 
either  as  borrower  or  depositor,  still  the  period- 
ical financial  disturbances  result  in  the  closing 
of  factories,  workshops,  mills,  and  mines,  and 
he,  with  millions  of  his  fellow  workers,  suffers 


28  THE   EVOLUTION   OF   BANKING 

from  long  periods  of  unemployment  with  all 
the  direful  consequences. 

The  raw  material  that  the  manufacturer  uses 
does  not  necessarily  deteriorate  from  non-use. 
The  uncut  forest  is  more  valuable,  for  the  trees 
have  been  growing  during  the  year  or  two  of 
depression,  or  if  cut,  the  lumber  is  better  for 
being  well  seasoned.  The  unmined  coal  is  just 
as  good  as  ever ;  but  labor  power  must  be  nour- 
ished or  it  wastes.  The  man  may  sink  into  the 
vagabond  or  criminal,  and  wives  and  children 
suffer  from  cold,  hunger,  and  privation. 

The  subject  of  bank  panics  and  periods  of 
industrial  depression  have  never  been  given 
the  study  they  rightly  deserve.  In  the  physical 
world,  the  eclipses  of  the  sun  and  moon  and 
the  precession  of  the  equinoxes  were  phenom- 
ena for  which  astronomers  formerly  could  give 
no  adequate  explanation,  because  their  theories 
were  founded  upon  the  utterly  false  premise 
that  the  earth  was  flat  and  stationary.  But  the 
Copernican  theory  of  the  revolution  of  the 
earth  upon  its  axis  each  twenty-four  hours,  and 
its  yearly,  journey  around  the  sun,  cleared 
away  the  mists  of  ignorance  that  surrounded 
the  subject  of  astronomy,  and  it  "has  since  be- 
come one  of  the  most  fascinating  of  sciences. 
The  same  condition  prevails  today  in  the  sci- 


THE  EVOLUTION   OF  BANKING  29 

ence  of  political  economy  as  prevailed  in  the 
science  of  astronomy  during  the  dark  ages. 
After  two  hundred  years  of  theorizing,  the  pro- 
fessors of  political  economy  are  unable  to 
predict  a  financial  crisis  or  period  of  industrial 
depression  or  offer  an  adequate  explanation  for 
one  when  it  appears.  No  wonder  Gladstone 
said  that  the  surest  way  to  the  madhouse  was 
to  study  the  money  question. 

The  ancients  made  the  mistake  of  believing 
that  the  world  was  the  center  of  the  universe 
and  all  of  their  calculations  based  upon  that 
error  were  valueless. 

The  modern  political  economists  make  a  sim- 
ilar error  when  they  place  the  interests  of  the 
possessing  class  in  the  center  of  their  little 
world  of  thought  and  ignore  the  interests  of 
the  far  larger  and  more  important  producing 
class. 

An  American  author  of  international  repute, 
after  studying  the  subject  of  money  for  years, 
wrote:  "In  every  age,  whole  philosophies  of 
what  was  once  supposed  to  be  knowledge, 
withers  away,  fit  only  to  enrich  the  soil  of 
something  better.  An  encyclopedia  of  the  po- 
litical economy  of  slavery  would  not  be  of 
much  value  today.  It  is  better  to  look  into  the 
new  facts  of  our  day,  and  the  rising  aspirations 


30  THE  EVOLUTION   OF  BANKING 

of  the  multitudes  to  become  peoples,  for  the 
truths  of  money — by  what  tools  of  exchange 
we  are  to  serve  each  other  in  the  market — than 
to  wander  through  the  teeming  graveyards  of 
economic  literature." 

Between  the  years  1810  and  1860,  there  were 
ten  bank  panics  in  the  United  States — an  aver- 
age of  one  each  five  years.  Since  the  close  of 
the  Civil  War  there  have  occurred  the  panics 
of  1873,  1893,  1907,  and  1913-14,  and  there  have 
been  disturbances  and  depressions  of  trade  and 
industry  of  more  or  less  marked  intensity  dur- 
ing the  entire  period.  In  considering  the  panic 
of  1873,  and  the  years  of  depression  following 
it,  the  Director  of  the  United  States  National 
Bureau  of  Labor,  in  his  report  of  1886,  found 
that  the  most  severe  effects  were  felt  in  those 
countries  in  which  the  employment  of  machin- 
ery, the  efficiency  of  labor,  the  cost  and  the 
standard  of  living,  and  the  extent  of  popular 
education  were  the  greatest.  It  was  felt  alike 
in  nations  that  had  been  involved  in  war,  as 
well  as  those  that  had  maintained  peace ;  those 
that  had  a  currency  based  on  gold;  and  those 
having  a  paper  currency  based  on  promises  to 
pay  that  had  not  been  kept ;  free  trade  coun- 
tries and  those  maintaining  a  protective  tariff; 
republics  like  the  United  States  or  France ;  lim- 


THE    EVOLUTION    OF    BANKING  31 

ited  monarchies  like  England,  and  the  auto- 
cratically ruled  Russia. 

POLITICS  IS  NOT  THE  CAUSE 

Panics  have  occurred  in  the  United  States 
under  Democratic  and  Republican  administra- 
tions; under  a  low  tariff  and  under  a  high 
protective  tariff.  Free  trade  would  not  be  a 
preventive  here  any  more  than  it  has  been  in 
England.  The  frequency  of  elections  is  not  the 
cause,  as  witness  Russia,  where  there  are  prac- 
tically no  elections  held.  Failure  of  crops  can- 
not be  named  as  a  cause,  as  the  crop  harvested 
the  present  year  (1914)  was  the  largest  in  our 
history.  The  failure  of  the  State  Banks  before 
the  war  was  caused  primarily  by  the  inability 
of  the  banks  to  redeem  their  circulating  notes 
in  gold  and  silver  on  demand  as  agreed.  It 
was  not  caused  b}^  the  redundancy  of  the  notes 
as  is  so  often  alleged  as  the  following  figures 
disclose : 

1857— 

Bank  notes  in  circulation $214,778,000 

Other  money  in  circulation 242,300,000 

Total    $457,078,000 

Population    28,916,000 

Circulation  per  Capita $15.81 


32  THE  EVOLUTION  OF  BANKING 

If  to  the  above  we  add  the  Bank  Deposits 

which  circulated  by  means  of  Bank  checks,  we 

have 

Total  notes  and  money  in  circulation. . .  .$457,078,000 
Bank  Deposits   230,251,000 

Total    $687,329,000 

Circulation  per  Capita 23.75 

1912— 

General  stock  of  money  in  the  U.  S.. $3,284,000,000.00 

Population    95,237,000 

Circulation  per  capita 34.45 

If,  to  the  above  we  add  the  Bank  Deposits 
which  circulated  by  means  of  Bank  Checks,  we 
have 

General  stock  of  money  in  the  U.  S. .  $  3,284,000,000.00 
Bank  Deposits   17,024,000,000.00 

Total    $20,308,000,000.00 

Circulation  per  capita  $213.20,  or  nine  times 

the  circulation  per  capita  of  1857. 

Now  let  us  compare   the   condition   of  the 

Banks  of  the  two  years  as  to  their  ability  to 

redeem  their  liabilities  in  cash. 

Condition  of  Banks  in  1857 — 

Circulating  notes  outstanding $214,778,000 

Due  Depositors   230,251,000 

Demand  Liabilities  $445,029,000 

Cash  Reserve  111,554,000 

or  25.6  per  cent. 

Condition  of  Banks  in  1912. 

Due  Depositors  $17,024,000,000 

Cash  Reserve   1,573,000,000 

or  9.2  per  cent. 


THE   EVOLUTION    OF   BANKING  33 

These  figures  show  in  a  startling  manner 
some  very  pertinent  facts.  One  is  that  the 
banks'  percentage  of  cash  reserve  was  three 
times  as  great  in  1857  as  it  was  in  1912.  And 
yet  the  panic  of  1857  was  the  worst  that  up 
to  that  time  had  ever  swept  over  the  country. 
Every  bank  in  the  United  States  suspended. 

Another  fact  disclosed  is  that  while  the  stock 
of  money  in  the  United  States  increased  from 
$15.81  to  $34.45  per  capita,  or  118  per  cent,  the 
liability  of  banks  to  their  depositors  increased 
from  $7.96  to  $178.75,  or  2145  per  cent.  Or,  in 
other  words,  while  the  stock  of  money  in  the 
United  States  a  little  more  than  doubled,  the 
liabilities  of  the  banks  to  depositors  multiplied 
more  than  20  times. 

This  explains  why  the  banks  demanded  a 
Federal  Reserve  Act  and  got  it.  The  banks 
are  now  in  a  position,  in  case  of  stress,  to  un- 
load on  the  United  States  Treasury,  through  the 
Federal  Reserve  Banks  and  Federal  Reserve 
Board,  at  their  face  value,  a  considerable  por- 
tion of  their  assets  in  the  shape  of  notes,  bills 
of  exchange,  bonds,  and  other  promises  to  pay, 
and  receive  Federal  Reserve  Notes,  which  are 
an  obligation  of  the  United  States  Government 
and  payable  in  gold  on  demand  at  the  U.  S. 
Treasury  at  Washington,  D.  C,  or  in  gold  or 


34  THE   EVOLUTION   OF   BANKING 

lawful  money — greenbacks,  silver  dollars,  etc. 
(but  not  National  Bank  Notes),  at  any  Federal 
Reserve  Bank. 

The  Banks,  before  the  war,  were  forced  to 
close  their  doors  because  they  could  not  keep 
their  promise  to  redeem  their  deposits  and 
bank  bills  in  coin  on  demand. 

The  panic  of  1873  found  the  public  in  a  dif- 
ferent frame  of  mind.  The  use  of  Greenbacks 
and  National  Bank  Currency  had  accustomed 
them  to  the  use  of  a  paper  currency  based  on 
the  credit  of  the  federal  government.  They 
therefore,  did  not  demand  the  redemption  of 
their  bank  notes  in  coin,  although  they  could 
have  done  so.  The  demand  was  for  the  redemp- 
tion of  the  deposits  in  currency  and  this  was 
impossible  as  the  issue  of  Greenbacks  was  lim- 
ited by  the  Act  of  Congress,  and  National  Bank 
Notes  could  only  be  issued  upon  the  deposit  of 
government  bonds  with  the  United  States 
Treasurer.  The  Banks  could  not  redeem  their 
deposits  even  in  paper  currency.  The  same 
thing  occurred  in  1893,  when  415  banks  and 
more  than  15,000  merchants  failed  with  a  total 
liability  of  over  $500,000,000.  Again,  in  1907, 
the  banks  were  run  down  by  the  public  and 
resorted  to  various  expedients  and  forced  the 
public  to  use  certified  checks,  cashiers'  checks, 


THE   EVOLUTION   OF   BANKING  35 

and  clearing  house  certificates  in  place  of 
money. 

After  over  one  hundred  years  of  bitter  ex- 
perience, it  has  at  length  dawned  upon  the 
minds  of  the  American  bankers  that  a  bank 
system  that  carries  demand  liabilities  of  from 
four  to  ten  times  the  amount  of  cash  on  hand 
is  an  impossible  system. 

And  the  Federal  Reserve  Act,  instead  of  pro- 
viding for  an  increase  in  the  cash  reserve, 
allows  a  decrease  of  30  per  cent.  This  decrease 
in  the  reserve  requirements  gives  the  National 
Banks  the  right  to  loan  over  $800,000,000  more 
credit. 

In  case  of  a  run  on  the  banks  the  loans  thus 
made  can  be  deposited  with  the  United  States 
Treasurer  and  Federal  Reserve  Notes  issued  to 
them  to  the  amount  of  two  and  one-half  times 
the  amount  of  gold  the  bank  has  on  hand. 
These  Federal  Reserve  Notes  are  an  obligation 
of  the  United  States  Government  payable  in 
gold  on  demand  in  Washington.  There  are 
now  $346,000,000  of  Legal  Tender  Notes  out- 
standing, which  are  payable  on  demand  in 
gold,  and  the  government  has  a  reserve  of  only 
$150,000,000  with  which  to  redeem  them  if 
asked.  Where  the  gold  is  to  come  from  to  re- 
deem the  Federal  Reserve  Notes,  which  will 


36  THE   EVOLUTION   OF   BANKING 

certainly  be  issued  some  time  in  the  future,  is 
a  question  no  one  can  answer. 

If  the  present  financial  system  continues,  its 
future  history  will  be  but  a  repetition  of  the 
past.  Panics  and  industrial  depressions  will 
follow  one  another  with  all  the  misery  they 
entail. 

A  new  system  must  take  its  place  in  which 
labor  will  be  the  standard  of  value  instead  of 
gold.  The  new  financial  legislation  must  be 
formulated  solely  with  the  view  of  increasing 
the  production  of  commodities  and  their  distri- 
bution among  the  workers  who  engage  in  the 
necessary  labor.  The  interests  of  the  possess- 
ing class  must  be  ignored  and  the  interests  of 
the  workers  only  considered. 


THE  EVOLUTION   OF  BANKING  37 

THE  BANK  OF  VENICE 

The  Bank  of  Venice  was  founded  in  the  year 
1171  through  the  necessities  of  the  Venetian 
Republic.  The  expenses  of  the  Republic  in  its 
war  with  the  Emperor  of  Greece  were  so  great 
that  the  state  was  compelled  to  make  a  forced 
loan  from  the  wealthy  citizens,  who  were  prom- 
ised an  annual  interest  at  the  rate  of  4  per 
cent  per  annum.  A  Chamber  of  Commissions 
was  created  from  the  contributors  to  manage 
the  loan,  transfer  the  stock,  and  pay  the  inter- 
est. The  loan  was  increased  later  by  other 
loans  upon  the  same  terms.  Each  contributor 
was  credited  on  the  public  ledger  with  the 
amount  of  his  contribution,  which  he  could 
transfer  to  another  either  in  whole  or  in  part 
whenever  he  desired.  The  convenience  of 
transfer,  the  prompt  payment  of  the  interest, 
together  with  the  security  of  the  state,  made 
this  public  debt  attractive  to  those  having  sur- 
plus funds  on  hand  and  soon  led  to  a  rapid 
circulation  of  the  loan.  No  cash  payments  were 
ever  made  on  account  of  this  loan.  The  repay- 
ment of  the  loan  to  the  creditors  of  the  state 
soon  ceased  to  be  considered  either  necessary 
or  desirable.  The  funds  received  through  these 
loans  were  used  for  public  purposes  and  the 


38  THE    EVOLUTION   OF   BANKING 

specie  found  its  way  back  into  circulation 
through  the  various  channels  of  public  ex- 
penditure. 

The  convenience  of  transferring  a  credit  on 
the  books  of  the  bank  in  payment  of  a  debt 
or  for  the  purchase  of  goods  was  so  great  that 
in  the  year  1423  it  was  decreed  that  all  bills  of 
exchange,  whether  domestic  or  foreign,  pay- 
able in  Venice,  unless  otherwise  stipulated, 
should  be  paid  in  the  bank,  and  that  all  pay- 
ment, in  gross  or  in  wholesale  transactions, 
should  be  effected  in  the  bank.  The  practical 
effect  of  this  was  to  make  all  money  in  the 
bank  legal  tender  for  all  debts. 

The  merchants  and  traders  of  Venice  depos- 
ited the  gold  and  silver  coins  that  came  into 
their  possession  in  the  bank  and  received  credit 
at  their  value  as  bullion.  This  was  a  great 
improvement  over  the  old  method  of  settling 
the  vast  commerce  of  this  maritime  city  by 
means  of  payments  in  cash.  The  vessels  arriv- 
ing in  Venice  brought  with  them  from  all  parts 
of  the  then  known  world  an  endless  diversity 
of  coins.  Many  of  these  were  so  worn  that  the 
inscription  was  undecipherable.  Others  had 
been  clipped  or  sweated,  and  part  of  their  orig- 
inal value  thus  abstracted.  Cities,  principali- 
ties, petty-nobles  and  patrician  families  exer- 


THE   EVOLUTION    OF   BANKING  39 

cised  independent  rights  of  coinage  and  the 
debasement  of  coinage  both  in  weight  and  fine- 
ness was  all  but  universal.  Large  numbers  of 
counterfeits  were  in  circulation.  Attempts  to 
settle  debts  or  pay  for  purchases  or  merchan- 
dise frequently  resulted  in  endless  disputes 
and  wrangles. 

The  facilities  offered  by  the  bank  simplified 
the  commercial  transactions  of  the  day  and 
created  a  great  additional  demand  for  funds  of 
the  bank  and  brought  large  sums  into  the 
public  offices.  The  merchant  class  speedily  took 
advantage  of  the  new  method  of  payments ;  the 
demand  for  bank  credit  was  greater  than  the 
supply ;  and  during  the  whole  existence  of  the 
bank,  credits  on  its  books  were  worth  a  large 
premium  over  coins.  This  extraordinary  fact 
that  a  credit  on  books  of  the  bank  with  no 
money  in  its  vaults,  which  paid  no  interest 
upon  its  deposits  during  the  last  four  hundred 
and  fifty  years  of  its  existence,  and  which  was 
not  bound  to  pay  its  depositors  in  cash,  either 
on  demand  or  at  any  future  time,  should  com- 
mand a  high  premium  over  gold  and  silver,  has 
been  the  cause  of  considerable  speculation. 
This  premium  or  agio,  as  it  was  called,  rose  to 
30  per  cent  over  coins  and  continued  to  fluctuate 
near  this  high  point  until  the  government  by 


40  THE   EVOLUTION   OF  BANKING 

decree  limited  it  to  20  per  cent,  at  which  point 
it  remained  until  the  extinction  of  the  Republic 
by  Napoleon  and  the  French  Army  in  1797.  The 
government's  attempt  to  limit  the  premium  on 
bank  funds  was  rendered  abortive  by  the  intro- 
duction of  the  sur  agio  or  extra  premium  based 
on  the  agio  and  the  original  sum  together.  This 
additional  premium  ranged  from  20  to  30  per 
cent  for  a  long  period. 

No  adequate  explanation  for  the  agio  seems  to 
be  offered  by  anyone.  One  reason  advanced  is 
the  difference  between  the  value  of  the  ducat 
and  the  coins  then  current  in  Venice.  The 
money  of  account  of  the  bank  was  the  ducat. 
The  Venetian  ducat  Avas  of  gold  and  was  one 
of  the  few  coins  then  circulating  that  had  not 
been  debased.  When  it  left  the  mint  it  was  full 
■weight  and  of  standard  fineness,  and  was  held  in 
high  repute  everywhere  on  account  of  its  purity. 
But  this  does  not  explain  the  agio,  for  the  bank 
never  paid  out  any  coins  of  any  description,  and 
therefore  the  expectation  of  receiving  gold 
ducats  from  the  bank  on  account  of  any  claim 
against  it  would  meet  with  disappointment. 
There  were  probably  several  causes  operating 
to  create  and  maintain  the  premium  on  bank 
deposits.  One  of  them  was  the  deplorable  state 
of  the  coinage  then  circulating  in  Italy,  and  the 


THE   EVOLUTION    OF    BANKING  41 

evil  was  particularly  aggravated  in  Venice, 
where  the  multiplicity  of  coins  was  probably 
unequaled  anywhere  in  the  world.  The  settle- 
ment of  debts  and  the  payments  for  merchan- 
dise could  not  fail  to  be,  under  such  a  system, 
anything  but  a  tedious  and  vexatious  process. 
It  was  necessary  to  scrutinize  each  coin  sep- 
arately as  to  its  genuineness,  weight  and  value. 
The  time  consumed  and  the  disputes  arising  as 
to  the  values  allowed  for  certain  coins  must 
have  been  a  source  of  irritation  to  the  princi- 
pals interested,  especially  where  the  amount 
involved  was  a  large  one.  Only  the  wealthiest 
merchants  could  afford  to  keep  an  expert  in 
their  employ,  and  the  smaller  merchants  were 
compelled  to  assume  the  risk  of  loss  through 
counterfeits  and  over-valued  coins. 

An  added  risk  was  that  of  robbery  or  defal- 
cation, which  is  ever  present  w^here  a  large  sum 
of  cash  is  kept  on  hand.  The  facilities  offered 
by  the  bank  obviated  these  risks  and  annoy- 
ances. If  a  merchant  had  a  financial  obligation 
to  meet  he  did  not  accumulate  the  funds  in  his 
strong  box,  but  carried  them  to  the  bank  and 
placed  them  to  his  credit.  The  coins  were  val- 
ued by  the  skilled  employes  of  the  bank,  and 
when  the  day  of  settlement  arrived  the  two 
principals  went  to  the  bank  together  and  the 


42  THE   EVOLUTION   OF   BANKING 

transfer  was  made.  These  considerations  nat- 
urally caused  a  steady  demand  for  the  use  of 
money  in  bank.  Another  and  probably  the 
strongest  reason  for  the  agio  was  an  active  de- 
mand by  the  commercial  classes,  which  is  ever 
present  in  all  trade  centers,  for  accommodations 
with  which  to  meet  maturing  obligations  which 
for  some  reasons  they  had  not  been  able  to  pro- 
vide. Punctuality  in  meeting  his  financial  en- 
gagements in  order  to  maintain  his  credit  was 
as  necessary  to  the  merchant  of  Venice  as  it  is 
the  merchants  of  today  in  America.  There  were 
undoubtedly  a  considerable  number  of  money 
lenders  in  the  city  who  kept  their  capital  to 
their  credit  in  the  bank.  A  merchant  having  a 
bill  of  exchange  to  meet,  and  with  insufficient 
funds  to  his  credit  in  the  bank,  would  naturally 
apply  to  one  of  those  money  lenders  for  an 
accommodation,  and  would  be  willing  to  pay  a 
bonus  to  have  transferred  to  his  credit  sufficient 
funds  to  enable  him  to  pay  his  maturing  obliga- 
tions and  thereby  protect  his  commercial  stand- 
ing. As  the  bank  did  not  discount  notes  or  loan 
its  credit  in  any  way,  this  was  his  only  alterna- 
tive. By  the  edict  of  the  council  of  Venice  all 
bills  of  exchange  were  payable  in  the  bank,  and 
the  creditor  could  refuse  the  coins  then  circulat- 
ing in  Venice.    This  method  of  settling  accounts 


THE   EVOLUTION    OF   BANKING  43 

brought  an  ever-increasing  amount  of  business 
to  the  city  and  largely  increased  the  deposits  of 
the  bank, 

Mr.  Lewis  (London,  1676)  tells  of  the  sugges- 
tion of  a  Venetian  merchant  intended  to  prevent 
the  high  premium  on  credit  in  the  bank.  The 
method  suggested  was  to  have  the  bank  occa- 
sionally, instead  of  transferring  the  credit, 
tender  the  amount  in  gold  or  silver,  and  thus, 
by  raising  a  doubt  in  the  mind  of  the  public  as 
to  what  they  would  receive  at  the  bank,  prevent 
the  premium  on  the  bank  money  from  going  to 
an  excessive  figure.  But  this  suggestion  does 
not  seem  to  have  been  acted  upon;  in  fact,  it 
would  have  probably  been  inoperative  had  it 
been  tried,  as  the  recipient  of  the  coins  could 
have  deposited  them  to  his  credit  and  so  in  the 
end  nothing  would  have  been  gained. 

Great  care  was  exercised  by  the  bank  to  pre- 
vent errors  or  fraud.  Every  transfer  was  made 
in  the  presence  of  two  bookkeepers  who  kept 
separate  sets  of  books.  The  bank  was  closed  one 
day  each  week  to  check  the  transactions.  The 
bank  was  also  closed  for  twenty  days  at  a  time 
four  times  a  year  and  the  books  balanced.  Dur- 
ing these  bank  holidays  no  paper  matured  or 
could  be  protested  until  six  days  after  the  re- 
opening of  the  bank. 


44  THE   EVOLUTION    OF   BANKING 

The  bank  became  such  an  indispensable  ad- 
junct to  the  commerce  of  the  day  that  Venice 
became  practically  the  clearing  house  for  the 
merchants  of  Europe  and  maintained  that  posi- 
tion for  centuries.  Bills  of  exchange  came  to 
be  used  more  and  more  and  the  concentration 
of  payments  in  the  Bank  of  Venice  kept  a  con- 
tinual stream  of  coin  flowing  into  the  bank  to 
make  the  credits  on  the  books  with  which  these 
payments  must  finally  be  met. 

The  bank's  deposits  increased,  or  rather  the 
public  debt  of  Venice  increased,  until  it  was 
sufficiently  large  to  liquidate  the  financial  obli- 
gations of  the  traders  as  they  matured  from 
day  to  day.  All  money  deposited  in  the  bank 
was  accounted  an  addition  to  the  original  loan, 
and,  as  such,  taken  into  the  public  treasury  as 
money  loaned  to  the  state.  The  treasury  being 
thus  replenished,  the  Eepublic  was  enabled  to 
maintain  its  position  among  the  nations  of 
Europe  without  burdening  commerce  or  its 
citizens  with  heavy  taxes.  There  does  not  seem 
to  have  been  any  thought  given  or  plans  laid 
looking  toward  the  ultimate  extinction  of  the 
public  debt  represented  by  the  total  amount  of 
deposits  in  the  bank.  There  is  every  reason  to 
believe  that  such  a  proposition  would  have  met 
with  universal  opposition.    The  first  step  would 


THE   EVOLUTION    OF   BANKING  45 

necessarily  be  to  reluse  to  receive  any  further 
deposits  of  coins.  This  would  result  in  the 
deposits  already  in  the  bank  commanding  a 
still  higher  premium  than  had  heretofore  pre- 
vailed. The  Republic  would  then  have  to  levy 
taxes  sufficient  to  meet  the  expenses  of  the 
state,  and  leave  a  surplus  each  year  that  could 
be  applied  to  the  gradual  extinguishing  of  the 
deposits.  The  increase  in  taxation  would  cer- 
tainly have  been  opposed  by  the  general  public. 
The  denial  to  the  merchants  of  Venice  and 
Europe  of  the  facilities  which  they  enjoyed 
through  the  bank,  of  settling  balances  between 
them  and  meeting  the  bills  of  exchange  or 
other  maturing  obligations,  by  the  transfer  of 
credit  in  bank,  would  have  unsettled  the  entire 
commercial  structure.  The  proposal  to  return 
to  the  discarded  method  of  payment  of  debts 
in  the  heterogeneous  coinage  which  in  the  past 
had  proven  itself  so  inadequate  to  the  needs  of 
commerce,  would  not  have  even  been  consid- 
ered worthy  of  discussion.  The  histories  of 
Venice,  so  far  as  can  be  ascertained,  do  not 
contain  any  evidence  of  objection  or  dissatis- 
faction either  by  public  speech  or  published 
writings  as  to  the  bank  or  its  methods. 

So  far  as  regards  failing  to  make  provision 
for  the  final  payment  of  the  public  debt,  Venice 


46  THE   EVOLUTION   OF   BANKING 

is  no  more  subject  to  criticism  than  other  na- 
tions of  the  world  that  have  since  come  into 
existence.  Walker,  in  his  ''Science  of  Wealth," 
page  377,  says:  ''No  large  national  debt  has 
ever  been  paid,  or  in  any  way  discharged,  ex- 
cept by  repudiation."  "The  debt  of  the  old 
French  monarchy  was  wiped  out  with  the  'as- 
signats.'  "  The  debt  incurred  in  the  Amer- 
ican Revolution  vanished  in  'worthless  con- 
tinental money.'  The  present  debts  of  Eng- 
land, France,  Austria,  and  other  European 
countries  are  so  large,  the  constantly  increas- 
ing demand  for  more  extensive  and  costly 
armaments  so  pressing,  so  absolutely  over- 
whelming, that  the  hope  of  any  payment  of  the 
principal  cannot  be  reasonably  indulged. ' ' 

Experience  finally  demonstrated  that  the 
bank  as  constituted  did  not  supply  all  the 
facilities  needed  by  the  merchants  in  the  ever- 
increasing  commerce  of  the  city.  The  inability 
of  the  depositor  to  withdraw  his  money  from 
the  bank  after  once  depositing  it,  caused  con- 
siderable inconvenience  to  those  who  needed 
the  coins  to  use  in  small  retail  transactions,  and 
to  those  traveling  to  a  foreign  country  and  who 
needed  a  stock  of  coin  for  personal  use.  To 
meet  these  requirements  the  bank  established  a 
second  department  of  the  bank,  in  which  could 


THE   EVOLUTION    OF   BANKING  47 

be  deposited  coin  or  bullion  with  the  right  of 
withdrawal  at  pleasure,  or  transferring  the 
title  if  desirable.  This  department  was  utilized 
by  those  having  money  in  hand  for  which  they 
had  no  immediate  use,  and  by  foreign  mer- 
chants arriving  in  Venice  for  the  purpose  of 
making  purchases  and  who  desired  to  await 
the  course  of  business  before  deciding  what 
disposition  to  make  of  it.  The  deposits  in  this 
department  of  the  bank  were  subject  to  with- 
drawal on  demand  and  thus  bills  of  exchange 
or  other  maturing  obligations  could  be  met  in 
coin  if  desired,  whereas  they  were  only  payable 
by  the  transfer  of  credits  on  the  books  of  the 
older  institution.  While  this  depository  was 
completely  successful  in  its  own  special  field, 
it  did  not  check  the  flow  of  money  into  the 
older  branch,  as  the  demand  for  bank  money 
always  exceeded  the  supply.  A  large  sum  of 
specie  accumulated  in  this  depository,  and  while 
the  amount  fluctuated  considerably  according 
to  the  exigencies  of  business,  a  large  percent- 
age remained  unmoved  and  was  used  as  an 
emergency  fund  by  the  government  in  times 
of  pressing  need.  This  policy  led  to  at  least 
two  suspensions  of  specie  payments  by  this 
branch  of  the  bank,  notably  from  1717  to  1739, 
but  the  branch  remained  open  and  the  deposits 


48  THE   EVOLUTION   OF   BANKING 

were  transferred  as  in  the  older  branch.  Dur- 
ing the  period  of  suspension  the  ti^o  depart- 
ments of  the  bank  were  practically  merged  into 
one,  so  far  as  their  operations  were  concerned, 
the  only  difference  being  that,  while  the  fund 
in  each  was  a  public  debt,  the  value  of  the 
deposits  in  the  older  branch  for  commercial 
purposes  did  not  vary,  the  deposits  in  the  cash 
office  fell  at  one  time  to  a  discount  of  20  per 
cent.  At  its  earliest  -opportunity  the  state  re- 
sumed specie  payments  and  the  business  of  each 
department  fell  into  its  appropriate  channel. 

The  Bank  of  Venice  was  closed  by  Napoleon 
when  he  entered  the  city  with  his  army  in  1797, 
but  he  failed  to  secure  one  penny  of  loot, 
McLeod,  in  his  ' '  Theory  and  Practice  of  Bank- 
ing," page  290,  says  that  it  is  one  of  the  de- 
lusions of  historians  and  economists  that  the 
Bank  of  Venice  was  established  in  1171,  but 
that  the  organization  took  place  in  1587,  when 
the  merchants  of  the  city  were  invited  to  de- 
posit their  monc}^  in  an  office  managed  by  the 
Commissioners  of  the  Public  Debts.  These  de- 
posits could  be  withdrawn,  but  for  four  hundred 
and  sixteen  years  it  had  been  transferred  from 
one  account  to  anotlier  of  the  merchants  of  Ven- 
ice and  Europe,  and  had  by  this  means  ex- 
changed commodities  and  discharged  debts  to 


THE   EVOLUTION   OF   BANKING  49 

the  satisfaction  of  all  concerned,  and  in  a  way 
far  more  to  the  advantage  of  the  public  than 
could  possibly  have  been  secured  by  the  use  of 
coins. 

McLeod  forgot  evidently  that  on  page  286 
of  the  same  volume  he  had  written  the  follow- 
ing: "It  is  often  said  that  the  temples  of 
Greece,  especially  those  of  Delos  and  Delphi, 
acted  as  great  banks  of  deposit.  It  is  true  that 
they  received  sums  of  money  for  safe  custody, 
but  we  do  not  think  there  is  any  evidence  to 
show  that  either  they  or  the  Greek  money  deal- 
ers settled  claims  by  transferring  credits  from 
one  account  to  another,  ivliich  is  the  essential 
feature  of  "Banking."  (The  Italics  are  mine. 
R.  H.  H.)  This  is  what  the  bank  of  Venice  did 
precisely ;  transferred  credits  from  one  account 
to  another  during  the  entire  six  hundred  and 
twenty-six  years  of  its  existence.  The  Bank  of 
Venice  was  therefore  an  institution  engaged  in 
the  business  of  ''Banking,"  according  to  Mc- 
Leod's  own  definition  of  the  functions  of  a 
bank. 


50  THE   EVOLUTION    OF   BANKING 


THE  STORY  OF  THE  GUERNSEY  MARKET 

Gladstone  once  said  that  the  surest  way  to 
get  into  the  insane  asylum  was  to  study  the 
money  question.  He  could  not  have  made  that 
statement  had  he  been  familiar  with  the  simple 
manner  in  which  the  inhabitants  of  one  of  Eng- 
land's  Channel  Islands  had  solved  the  question 
for  themselves  and  in  a  way  so  direct  and 
logical  that  it  is  strange  the  political  econ- 
omists have  paid  so  little  attention  to  it. 

At  the  close  of  the  Napoleonic  Wars  the 
Island  of  Guernsey  was  in  a  deplorable  state, 
both  financially  and  physically.  The  sea  walls 
were  in  such  a  bad  state  that  large  areas  had 
been  swept  away  and  other  tracts  were  in  dan- 
ger of  inundation.  The  estimated  cost  to  repair 
and  strengthen  the  sea  walls  was  $50,000, 
which  the  parishes  adjoining  the  threatened 
districts  were  too  poor  to  supply. 

The  annual  revenues,  after  providing  for  the 
interest  on  the  public  debt  and  ordinary  ad- 
ministrative expenses  left  a  surplus  of  only 
$3,000  for  unforeseen  expenses  and  improve- 
ments. 

The  roads  leading  to  St.  Peter,  the  principal 


THE   EVOLUTION    OF   BANKING  51 

port,  were  too  narrow  for  a  horse  and  cart  to 
pass  abreast.  They  were  only  four  and  a  half 
feet  wide,  unpaved  and  the  rains  tended  to 
render  them  deeper  and  narrower. 

There  were  no  public  conveyances  for  the 
use  of  visitors.  There  was  not  a  four-wheeled 
carriage  in  the  Island. 

The  conditions  of  the  thoroughfares  of  St. 
Peter  were  no  better.  Narrow  lanes  were  the 
rule  and  the  main  street  that  led  from  the 
country  to  the  harbor  was  only  seven  feet  wide 
and  lined  on  both  sides  by  lofty  buildings. 

The  impossibility  of  carts  passing  each  other 
in  such  a  narrow  passage  resulted  in  congested 
traffic  at  each  end  and  accidents  were  numer- 
ous and  delays  exasperating. 

The  population  was  decreasing — stagnation 
of  business  causing  the  laboring  class  to  emi- 
grate and  those  in  comfortable  circumstances 
were  leaving  in  search  of  the  conveniences  and 
pleasures  the  Island  failed  to  afford. 

The  circulating  medium  consisted  of  badly 
worn  French  and  English  coins.  There  was  no 
bank  in  the  Island. 

The  Government  of  the  Island  is  autonomous. 
It  has  a  Parliament,  called  the  "States,"  which 
is  elected  from  the  parishes,  but  its  decisions 
are  subject  to  the  Privy  Council  of  Great  Brit- 


52  THE   EVOLUTION   OF   BANKING 

ain,  to  whom  there  is  also  the  right  of  appeal. 

The  pressing  need  of  a  revenue  led  the  States 
to  request  the  Privy  Council  to  permit  an 
excise  tax  to  be  levied  to  one  shilling  per  gal- 
lon on  spirituous  liquors.  This  was  granted  for 
a  period  of  five  years.  The  duty  was  renewed 
in  1819  for  a  further  period  of  ten  years  and  in 
1825  for  fifteen  years,  or  until  1844.  One  thou- 
sand pounds  per  year  of  this  duty  was  to  be 
used  to  liquidate  the  public  debt. 

As  was  usual  in  provincial  towns  in  the  early 
part  of  the  nineteenth  century,  a  great  part  of 
the  retail  trade  of  St.  Peter  was  carried  on  in 
a  public  market.  This  market  was  held  in  the 
vacant  space  around  the  church.  There  was 
no  building  provided  and  the  traffickers  were 
subject  to  all  the  losses  and  exposures  due  to 
heat,  rain  and  cold. 

A  committee  of  the  States  on  April  12,  1815, 
brought  in  a  recommendation  to  issue  £6,000 
($30,000)  in  one  pound  State  notes,  for  the  pur- 
pose of  providing  a  suitable  market  for  the 
use  of  the  farmers  and  townsmen.  The  States 
rejected  this  recommendation.  However,  later 
in  the  same  year  the  Finance  Committee  re- 
ported money  was  badly  needed  for  roads.  The 
States  authorized  the  issue  of  £4,000  ($20,000) 
in  notes,  which  were  to  be  redeemed  out  of  the 


THE   EVOLUTION    OF   BANKING  53 

liquor  tax  at  various  fixed  dates  during  the 
following  three  years. 

It  will  thus  be  seen  that  while  the  issue  of 
notes  was  first  urged  on  behalf  of  the  market, 
and  they  thus  become  known  as  Market  House 
Notes,  the  real  security  for  their  redemption 
was  the  duty  on  liquor. 

These  notes  bore  no  interest,  but  circulated 
among  the  people  and  greatly  stimulated  trade 
and  commerce.  The  last  of  them  were  due 
April  15,  1818,  and  the  success  attending  their 
issue  and  circulation  resulted  in  a  new  issue  of 
£1,250  ($6,250),  on  June  18,  1818. 

A  meat  market  company  which  had  pur- 
chased a  site  and  some  buildings  for  £5,000 
($25,000)  had  been  given  the  privilege  of 
charging  a  certain  price  per  head  for  all  ani- 
mals killed,  upon  condition  that  it  would  sell 
the  site  to  the  States  at  any  future  time  at  the 
price  originally  paid.  The  States  took  advan- 
tage of  the  purchase  clause  on  April  10,  1817, 
borrowing  the  £5,000  at  4i/^  per  cent  interest, 
a  report  of  the  committee  to  issue  £1  notes 
with  which  to  make  the  purchase  being  re- 
jected by  a  majority  of  one  vote. 

The  advocates  of  a  larger  and  better  market 
still  persevered  and  were  finally  successful  on 


54  THE   EVOLUTION   OF   BANKING 

May  12,  1820,  five  years  and  one  month  after 
the  first  request  was  denied. 

The  States  provided  for  an  issue  of  £5,500 
($27,000)  in  States  notes  for  the  erecting  of 
the  building,  the  notes  to  be  redeemed  from 
the  rents  received  for  the  stalls,  to  which  the 
States  were  to  add  £300  ($1,500)  per  year  from 
the  duty  on  spirituous  liquors,  for  a  period  of 
ten  years. 

The  building  was  completed  and  opened  Sat- 
urday, Oct.  12,  1822,  with  a  general  jubilation. 
The  cost  of  the  building  was  about  $21,000. 

It  was  computed  at  the  inception  that  the 
Market  stalls  would  bring  a  net  annual  rental 
of  £150,  to  which  the  States  would  add  £300, 
making  a  total  of  £450,  or  $2,250,  and  the  notes 
could  all  be  redeemed  and  cancelled  in  ten 
years,  but  the  result  far  exceeded  their  an- 
ticipation. 

The  "Treasurer's  account  of  the  Market" 
for  the  year  1827,  as  published,  shows  a  net 
revenue  from  the  stalls  for  that  year  as  £608, 
or  over  four  times  the  anticipated  revenues. 

Had  the  Guernseymen  stopped  here,  the  suc- 
cess achieved  would  have  been  sufficiently 
illuminating  to  guide  other  communities  in  the 
way  of  financing  public  enterprises  without  re- 
course to  interest  bearing  bonds.    But  they  did 


THE   EVOLUTION   OF   BANKING  55 

not  Stop.  In  1820  they  issued  £4,000  ($20,000) 
in  one  pound  notes  and  paid  off  the  floating 
debt.  A  year  later  an  issue  of  £580  was  used 
to  purchase  a  house  occupying  a  site  needed 
for  the  new  market.  Later  in  the  same  year 
£4,500  ($22,500)  was  issued  to  redeem  an  out- 
standing interest  bearing  public  debt. 

In  1824  £5,000  ($25,000)  in  one  pound  notes 
were  issued  to  repay  the  4^/2  per  cent  loan 
made  in  1817  with  which  to  purchase  the  land 
upon  which  the  Market  house  was  built. 

In  1826  about  £10,000  ($50,000)  in  notes  were 
issued,  some  of  it  for  the  neighboring  Isle  of 
Sark,  the  balance  for  Elizabeth  College,  schools 
and  other  purposes. 

In  1827  £11,000  in  one  pound  notes  were  au- 
thorized to  be  used  in  widening  and  improving 
Rue  de  la  Fountaine,  a  street  adjoining  the 
market.  This  involved  the  destruction  of  old 
buildings  and  their  replacement  by  new  ones 
and  the  rents  were  pledged  to  redeem  the 
notes. 

This  was  followed  during  1828  and  1829  with 
further  issues,  among  which  was  one  appropria- 
tion of  £8,500  for  the  benefit  of  Elizabeth  Col- 
lege and  £11,000  for  street  improvements. 

A  threatened  epidemic  of  cholera  in  1834 
caused  an  appropriation  of  £1,000,  to  be  voted 


56  THE   EVOLUTION    OF   BANKING 

to  defray  the  costs  of  preventive  measures. 
This  vras  issued  in  one  pound  notes. 

Here  we  have  the  history  covering  a  period 
of  twenty  years,  during  which  time  approxi- 
mately £80,000  ($400,000)  of  non-interest  bear- 
ing circulating  notes  were  issued  and  which 
had  no  metallic  basis,  but  the  redemption  of 
which  was  secured  by  rents  from  stalls,  build- 
ings and  the  excise  tax.  The  worn  and  mu- 
tilated notes  were  replaced  by  new  ones.  They 
circulated  without  question  and  were  the 
source  of  great  benefit  and  convenience  to  all 
classes. 

While  the  total  issued  was  £80,000,  there 
never  was  at  any  time  more  than  £55,000  in  cir- 
culation. While  new  issues  were  provided  for 
new  purposes,  old  issues  were  being  redeemed 
by  the  application  of  surplus  revenues  that  had 
been  pledged  to  that  purpose. 

The  public  benefits  derived  by  the  Island  of 
Guernsey  through  this  method  of  financing  can 
be  appreciated  by  a  knowledge  of  the  fact  that 
during  the  fifteen  years  between  1815  and  1830, 
not  only  had  there  been  expended  $100,000.00 
on  old  and  new  breakwaters,  piers,  etc.,  but 
there  had  been  two  streets  in  the  town  widened, 
paved  and  sewered,  sixty-eight  miles  of  good 
country  roads  built,  in  addition  to  the  Market 


THE   EVOLUTION    OF   BANKING  57 

house,  which  had  cost,  for  land  and  building, 
£12,748,  or  $60,000. 

The  following  is  an  interesting  extract  from 
the  address  of  Daniel  de  Lisle  Brock  of  Dec. 
23,  1829 : 

"AVith  the  gratitude  for  the  means  placed  at 
their  disposal  the  States  feel  an  honest  pride 
in  the  recital  of  the  manner  in  which  those 
means  have  been  applied.  First,  considering 
the  danger  arising  from  the  bad  state  of  the 
sea  embankments,  and  the  hardship  of  subject- 
ing particular  parishes  to  a  charge  for  the 
general  safety  to  which  they  were  unequal,  the 
States  took  on  themselves  the  present  repairs, 
and  the  future  maintenance  of  those  embank- 
ments. This  essential  object  connected  with 
the  paved  slips  or  avenues  to  the  beach,  has 
been  attended  with  an  expense  of  $75,000, 
without  including  five  or  six  thousand  for  a 
breakwater  to  defend  the  line  of  houses  at 
Glatney,  on  the  north  side  of  the  town. 

"Independently  of  the  sums  contributed  by 
government  towards  the  military  roads,  about 
$150,000  have  been  expended  by  the  Island  on 
the  roads,  so  that  in  lieu  of  those  before  de- 
scribed, there  are  now  fifty-one  miles  of  roads 
of  the  first  class,  as  good  as  those  of  any  coun- 


58  THE  EVOLUTION    OF   BANKING 


try,  with  excellent  footways  on  all  of  them  and 
seventeen  miles  of  the  second  class. 

"Not  only  the  main  harbor,  piers,  quays, 
buoys  and  sea  marks  have  been  attended  to, 
and  at  a  great  expense,  but,  in  order  to  facili- 
tate the  exportations  of  the  granite  from  the 
north  of  the  Island,  the  harbor  of  St.  Sampson 
has  been  rendered  secure  and  convenient  by  a 
new  breakwater  and  quay. 

''The  situation  and  state  of  the  town  were 
thought  to  preclude  all  hopes  of  much  ameliora- 
tion, but  the  widening  of  High  street,  and  other 
streets,  the  reducing  of  the  precipitous  ascent 
to  the  Government  and  Court  Houses,  the  clear- 
ing away  of  the  unsightly  buildings  that  ob- 
structed the  view  and  approach  to  those  public 
edifices,  the  new  sewers,  pavements  and,  above 
all,  the  Public  Markets  and  new  Fountain 
street,  attest  the  solicitude  of  the  States  toward 
the  town,  and  surprise  those  who  return  to  it 
after  a  few  years '  absence.  And  to  those  the  en- 
larging and  improving  of  the  Court  House  and 
Record  Office,  where  the  public  have  daily  ac- 
cess, and  where  are  kept  the  contracts  and 
registry  of  all  the  real  property  of  the  Island. 
Add,  also,  the  new  college,  which,  with  the  lay- 
ing out  of  its  grounds,  the  roads  round  its 
precincts,  contributes  to  the  embellishment  of 
the  town,  induces  families  from  other  places  to 
settle  in  the  Island,  on  account  of  their  chil- 
dren, and  affords  to  the  inhabitants  the  ready 
means  of  a  good  education. 

"The  advantage  from  all  these  improvements 


THE  EVOLLTION   OF   BANKING  59 

has  not  been  confined  to  their  utility,  or  to  the 
increased  activity  given  to  industry,  and  the 
circulation  of  money  by  the  public  expendi- 
ture; they  have  excited  in  all  classes  a  similar 
spirit  of  improvement,  which  displays  itself  in 
the  embellishment  of  the  premises  already  built 
upon,  and,  above  all,  in  the  number  of  the  hand- 
some dwellings  since  erected.  In  the  town  par- 
ish alone,  401  houses  have  been  built  since  the 
year  1819  at  an  expense  of  upwards  of  $1,000,- 
000,  and  few  towns  do  now  present  a  more 
animated  scenery  around  them,  or  one  where 
ornament  and  comfort  are  more  generally 
united;  the  same  comfort  and  improvements 
are  witnessed  in  every  direction,  and  at  the 
greatest  distance  from  town.  And  thus  it  is 
that  the  public  works  have  not  only  given  life 
and  activity  to  every  species  of  industry  by 
the  immediate  effects  of  their  utility,  as  for 
example  to  the  building  of  a  number  of  mills 
in  the  Island,  before  supplied  with  most  of  its 
flour  from  abroad,  and  now  enabled  to  manu- 
facture it  for  exportation,  but,  and  still  more 
by  the  consequent  impulse  communicated  on 
all  sides,  prompting  the  wealthy  to  lay  out  for 
private  mansions  greater  sums  than  were  ex- 
pended for  public  works  and  creating  a  perma- 
nent source  of  employment,  by  the  future  ex- 
penses which  the  repairs  and  occupations  of 
those  mansions  will  require.  The  extent  of 
benefits  conferred  is  sufficiently  attested  by  the 
concurrent  testimony  of  inhabitants  and  stran- 
gers." 


60  THE   EVOLUTION   OF   BANKING 


OPPOSITION  BY  PRIVATE  BANKERS 

At  the  time  the  notes  were  first  issued  the 
currency  of  the  Island  consisted  of  a  mixed, 
badly  worn  coinage — French  and  English. 
There  was  no  bank  on  the  island  and  none  was 
established  until  the  notes  had  been  circulating 
for  over  ten  years.  Consequently  there  had 
been  no  opposition  from  privately  owned  bank- 
ing corporations. 

In  1826  three  members  of  the  States,  two  of 
them  members  of  the  finance  committee,  ob- 
jected to  the  improvements  contemplated  in  the 
widening  of  a  street  unless  the  consent  of  the 
King  was  first  secured.  Their  resolution  to  this 
effect  was  overwhelmingly  defeated. 

The  next  year  the  Guernsey  Banking  Com- 
pany was  established  with  one  of  the  three 
objectors  as  vice  president.  On  the  10th  of 
April,  1829,  the  above-mentioned  objectors  with 
three  more  complained  directly  to  the  British 
Government.  The  complaint  was  referred  back 
to  the  States  for  reply.  The  answer  drafted 
by  Daniel  de  Lisle  Brock  is  well  worth  reading, 
even  though  penned  nearly  a  century  ago,  and 
was  evidently  so  convincing  that  the  opposi- 
tion ceased  for  a  while. 

But  in  1830  the  Commercial  Bank  was  started 


THE   EVOLUTION   OF   BANKING  61 

and  claimed  equal  right  with  the  Old  Bank  and 
even  with  the  States  to  issue  notes,  Daniel  de 
Lisle  Brock  summoned  the  States  to  consider 
the  matter,  evidently  with  the  intention  of 
obtaining  an  injunction  against  the  issue  of 
notes  by  the  Bank.  He  defended  the  rights  of 
the  States  as  against  private  individuals,  as 
the  following  quotation  from  his  address  will 
show: 

"If  there  is  one  incontcstible  principle  it  is 
that  all  matters  relating  to  the  current  coin  of 
the  country  have  their  source  in  the  supreme 
prerogative,  and  that  no  one  has  the  right  to 
arrogate  to  himself  the  power  of  circulating  a 
private  coinage  on  which  he  imprints  for  his 
own  profit  an  arbitrary  value.  If  this  is  true 
for  metal  coin  still  more  so  is  it  for  paper 
money,  which  in  itself  has  no  value  whatever." 

The  second  bank  should  have  kept,  and  still 
ought  to  keep,  to  the  legitimate  business  of 
banking  transactions.  It  appeared  to  have  for 
its  principal  object  the  issue  of  paper  money. 
The  Bank  makes  no  secret  of  its  pretensions: 
there  are,  it  says,  three  parties  for  issuing 
paper  money ;  this  issue  cannot  rise  above 
$450,000  since  the  circulation  in  the  country 
does  not  allow  for  more,  the  States  ought  to 
have  only  one-third  of  the  issue,  the  two  banks 
the  remaining  two-thirds.    This  is  a  fine  way  of 


62  THE  EVOLUTION  OF  BANKING 

making  the  division,  and  very  convenient  for 
the  Commercial  Bank.  It  would  even  have 
some  show^  of  justice  if  the  parties  had  equal 
rights,  and  if  the  public  had  no  interest  in  the 
matter ;  but  the  rights  are  not  equal — the  bank 
has  none  to  put  forward,  that  of  the  States  is 
incontestible :  they  exercise  it  for  the  welfare 
and  advantage  of  the  whole  Island  which  they 
represent.  Consequently  the  public  has  the 
greatest  interest  in  preserving  for  the  States 
the  power  of  issuing  paper  money  without  in- 
terruption. Let  the  bank  reply  to  the  questions 
already  put ;  let  it  say  what  inducement  it  can 
offer  the  public  to  drive  out  of  circulation 
the  States  Notes,  the  profits  on  which  benefits 
all,  especially  the  productive  classes,  and  sub- 
stitute for  it  Bank  notes,  the  profit  on  which 
benefits  only  the  individuals  of  the  unpro- 
ductive classes?  Now  is  the  time  to  ask  the 
proprietors  themselves  and  ascertain  whether 
in  starting  a  bank  they  ever  had  the  intention 
of  letting  it  work  to  the  detriment  of  their 
countrJ^ 

"The  Public  Treasury  is  the  heart  of  the 
State — did  they  ever  wish,  do  they  today  wish 
to  strike  it  with  a  dagger?  The  Bank  should 
feel  that  it  is  not  enough  to  intend  not  to  in- 
jure, but  that  it  is  necessary  to  abandon  any 


THE   EVOLUTION   OF   BANKING  63 

such  step  which,  even  without  its  wish,  would 
be  prejudicial  to  the  interests  of  the  country. 
It  should  recognize  that  as  regards  the  circula- 
tion of  paper  money,  the  States  have  for  a  long 
time  and  for  the  common  good,  been  in  posses- 
sion of  the  ground  which  it  seems  to  wish  to 
invade  which,  however,  it  cannot  occupy  with- 
out injustice." 

The  debate  was  lengthy  and  animated  and 
was  around  a  proposition  as  published  in  the 
Comet  of  22nd  of  September,  1836 : 

"That  in  execution  of  the  numerous  ameliora- 
tions that  have  taken  place  during  the  last  20 
or  30  years,  the  States  having  put  into  circula- 
tion about  $275,000  in  one  pound  notes,  as  a 
financial  measure  in  favor  of  the  public  gen- 
erally, if  they  are  of  opinion  to  defend  the 
rights  of  the  States  against  those  who  wish, 
for  the  advantage  of  a  few  individuals  only,  to 
hinder  the  circulation  of  the  States  Notes,  for 
the  purpose  of  substituting  those  of  private 
individuals  in  lieu  thereof;  and  whether  it 
would  not  be  proper  to  make  an  appeal  to  all 
the  inhabitants,  who  are  the  friends  of  their 
country,  to  invite  them  to  afford  their  assist- 
ance in  supporting  with  all  their  might  the 

notes  belonging  to  the  States 

If  they  are  of  opinion  to  name  a  Committee 
that  shall  be  authorized  in  a  special  manner  to 
defend  the  rights  and  interests  of  the  States, 
and  of  the  public — to  do  their  utmost  by  every 
conciliatory  measure  in  their  power,  and,  above 


64  THE   EVOLUTION    OF   BANKING 

all,  to  agree  to  an  arrangement  that  shall 
screen  the  States  from  all  interruption  in  the 
circulation  of  their  Notes,  which  have  been  is- 
sued for  the  benefit  and  advantage  of  the  pub- 
lic, with  the  design  of  gradually  diminishing 
the  number  annually.  And  in  the  event  of  such 
an  arrangement  not  taking  place,  to  adopt 
every  measure  and  make  every  necessary  sacri- 
fice for  supporting  the  circulation  of  the  States 
Notes.  And,  finally,  should  the  case  require  it, 
to  propose  to  the  States  the  adoption  of  those 
ulterior  measures  deemed  requisite  by  the  Com- 
mittee, for  the  general  interests  of  the  Island." 

This  was  carried  by  a  decisive  majority. 

The  victory  of  the  States  seemed  complete. 
One  would  believe  that  the  matter  was  settled 
for  all  time  and  that  the  private  bank  notes 
would  be  withdrawn  from  circulation,  leaving 
the  issuance  of  the  circulating  medium  in  the 
hands  of  the  people — but  such  proved  not  to  be 
the  case. 

What  happened  during  the  interval  between 
the  meeting  of  Sept.  21,  1836  and  Oct.  9,  1836, 
no  one  can  tell.  The  records  are  absolutely 
blank  on  the  subject.  All  that  is  known  is 
that  on  the  latter  date  Daniel  de  Lisle  Brock 
signed  an  agreement  with  the  banks  to  the 
following  effect:  $75,000  of  the  States'  one 
pound  notes  would  be  withdrawn  from  circula- 
tion and  converted  into  a  bank  loan  drawing 


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o" 
o 

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« 


THE  EVOLUTION  OF  BANKING  65 

3  per  cent  interest.  The  States  pledged  them- 
selves not  to  have  at  any  time  more  than  $200,- 
000  in  circulation,  and  cease  collecting  the 
notes  of  the  Banks  in  cash  (Gold  and  Silver). 
As  a  result  of  this  agreement  the  States  with- 
drew from  circulation  $75,000  and  burdened 
the  people  with  an  annual  tax  of  $2,250,  to  pay 
the  interest  on  that  amount,  and  gave  over  to 
the  private  banks  the  monopoly  of  the  money 
of  the  Island  in  excess  of  $200,000  to  be  issued 
for  their  personal  profit  and  the  banks  sus- 
pended specie  payment  so  far  as  the  redemp- 
tion of  their  notes  held  by  the  Public  Treasury 
was  concerned.* 

There  are  still  circulating  in  the  Island  One 
Pound  States  Notes  to  the  amount  of  $200,000. 
These  notes  have  been  in  circulation  over 
ninety  years  at  no  cost  for  the  interest.  Had 
they  been  converted  into  bank  loan  as  was  the 
$75,000  in  notes  the  inhabitants  would  have 

♦Under  date  of  January  11th,  1915,  Mr.  J.  LePelley,  As- 
sistant Supervisor,  writes  to  Theo.  H.  Lunde,  of  Cliicago, 
as   follows : 

"To  prevent  a  panic,  the  States  had  passed  an  'Ordinance' 
making  all  notes,  bank  and  State,  legal  tender,  in  effect 
guaranteeing  the  notes  of  the  banks  and  limiting  their 
issues  to  those  notes  issued  previous  to  August  4th, 
1914. 

"Thanks  to  the  measures  taken,  the  banks  here  opened  on 
August  4th,  without  the  days  of  closure  that  they  had  to 
institute   in    the   mother   country. 

"I  do  not  anticipate  any  further  interference  with  the 
agreement  between  tlie  banks  and  the  States;  the  feeling 
appears  to  be  that  after  nearly  80  years  they  have  acquired 
vested  interests." 


66  THE    EVOLUTION    OF    BANKING 

paid  the  bankers  over  $550,000  in  interest  and 
still  owe  the  original  amount  of  over  $200,000, 
and  the  interest  vrill  run  on  and  on  for- 
ever if  the  people  never  w^ake  up  to  the  inbecil- 
ity  of  issuing  an  interest  bearing  debt  to  supply 
themselves  vi^ith  a  circulating  medium. 

As  it  is,  they  have  paid  $2,250  a  year  for 
interest  since  1836.  This  has  amounted  up 
to  the  present  time  to  $180,000  on  a  debt  of 
$75,000  and  which  debt  they  still  owe  the  bank. 

It  would  be  interesting  to  know  the  amount 
of  notes  the  Banks  have  in  circulation  at  the 
present  time  and  what  profit  they  have  made 
on  them. 

There  is  now,  and  has  been  for  fifty  years, 
$346,000,000  legal  tender  notes  outstanding  in 
the  United  States.  Had  these  notes  been  con- 
verted into  interest  bearing  bonds,  as  the  bank- 
ers desired,  the  people  of  the  United  States 
would  have  paid  as  interest  about  $700,000,- 
000.00  without  receiving  a  particle  of  benefit 
and  would  still  be  owing  the  bondholders  the 
original  $346,000,000.00. 

The  argument  advanced  by  some  political 
economists  that  the  issue  of  the  Guernsey 
States'  notes  merely  drove  an  equal  amount  of 
gold  out  of  circulation  is  a  fallacious  one.  The 
deplorable  condition  of  the  Island  reported  in 


THE    EVOLUTION    OF    BANKING  67 

public  documents  is  evidence  that  there  was  an 
insufficient  amount  of  money  in  circulation  to 
bring  together  the  unemployed  labor  and  the 
raw  material  which  existed  in  abundance. 

The  issuance  of  the  new  money  was  followed 
immediately  by  an  activity  in  all  lines  of  in- 
dustry— idle  men  were  employed  and  building 
materials  were  purchased — houses  were  built — 
roads  widened,  paved  and  sewered.  Old  houses 
were  demolished  and  better  ones  built  in  their 
stead. 

The  notes  were  destroyed  quarterly  as  they 
were  received  in  payment  of  rent  for  space  in 
the  building.  Some  of  the  notes  were  received 
from  the  "States"  as  an  appropriation  out  of 
the  tax  levy  by  the  local  governing  authorities, 
as  the  following  extract  from  the  Treasurer's 
Report,  published  in  "Jacob's  Annals  of  Guern- 
sey," Part  1, 1830,  shows : 

TREASURER'S  ACCOUNT  OF  THE  MARKET. 

Receipts. 

1827— 

Balance  from  last  quarter. 


Net  produce  of  the  first  quarter. . . 
Net  produce  of  the  second  quarter. 
Net  produce  of  the  third  quarter. . 
Net  produce  of  the  fourth  quarter. 
Annual  contribution  of  the  States. 

Total    1,008.      5.     11. 


£ 

8. 

d. 

99. 

14. 

0. 

110. 

12. 

6. 

282. 

10. 

5. 

115. 

5. 

11. 

400. 

0. 

0. 

68  THE    EVOLUTION    OF    BANKING 


Expenditures 
1827— 

State  Notes  destroyed. 

£  s.      d. 

May  30 500.      0.      0. 

August  2 110.      0.      0. 

November  1 283.       0.       0. 

1828— 

February  15 115.       0.       0. 

Balance  to  new  account 5.     11. 


Total    1,008.       5.     11. 

In  view  of  these  facts  the  history  and  expe- 
rience of  the  Guernsey  Islanders  should  be  read 
by  every  voter  in  America. 

The  commerce  of  this  country  is  no  longer 
carried  on  by  means  of  gold  and  silver  coins. 
It  is  not  even  carried  on  by  means  of  currency. 
The  cash  transactions  only  amount  to  five  per 
cent  of  the  w^hole.  The  balance,  95  per  cent, 
is  paid  in  bank  checks.  These  latter  total  more 
than  two  hundred  billion  dollars  each  year. 
All  this  immense  sum  is  based  on  bank  credits. 

It  is  very  evident  that  whoever  can  control 
the  bank  credits  can  control  all  business  and 
thereby  are  enabled  to  levy  tribute  on  every 
transaction. 

They  can  assure  success  to  some  by  extending 
credit  and  drive  others  out  of  business  by  re- 
fusing credit.    Such  a  power  in  the  hands  of  a 


THE    EVOLUTION    OF      BANKING  69 

class  would  result  in  an  Economic  Monarchy 
from  which  the  public  could  not  hope  to  escape. 
Congress  must  enact  such  legislation  as  will 
expand  the  functions  of  the  Treasury  and  the 
Postal  Banks  and  through  them  issue  all  money 
and  credit  for  all  public  purposes. 

FROM    AN    UNPUBLISHED    MANUSCRIPT 
BY   HENRY  D.   LLOYD 

"Professor  Jevons  says  there  is  no  mj^stery 
about  the  operation  of  the  paper  money  issued 
to  build  the  Guernsey  market  house.  It  simply 
4rovc  an  equal  amount  of  gold  out  of  circula- 
tion and  was  therefore  a  forced  loan  on  which 
no  interest  had  to  be  paid.  No  evidence  is 
given  to  support  this,  which  is  probably  as- 
serted because  the  bullion  theory  presupposes 
such  effects  in  such  cases.  If  the  market  house 
had  been  built  without  the  issue  of  any  money 
by  the  use  of  a  system  of  book  accounts,  or  if 
there  had  been  a  sort  of  communism  in  the 
Island,  would  the  construction  of  the  market 
house  have  been  accompanied  by  the  with- 
drawal of  four  thousand  pounds  from  circula- 
tion? If  the  gold  in  circulation  was  fully  em- 
ployed, if  the  men  who  built  the  market  were 
idle  and  there  was  no  commercial  demand  for 
the  stone  and  other  stuff  used,  how  could  the 


70  THE    EVOLUTION    OP    BANKING 

bringing  together  of  all  these  things  to  produce 
a  new  utility  and  new  source  of  wealth  pro- 
duction have  the  effect  of  driving  four  thou- 
sand pounds  out  of  circulation?  Would  not 
the  new  activity  and  prosperity  on  the  contrary 
have  such  an  effect  on  the  general  trade  and 
industry  as  to  greatly  stimulate  the  circula- 
tion of  the  gold  besides  keeping  in  circulation 
the  new  money?  Jevons'  statement  seems  to 
proceed  on  the  theory  that  no  matter  what 
the  amount  of  the  gold  circulation  may  be  it  is 
enough  for  all  the  currency  purposes.  No  ac- 
count is  taken  of  the  fact  that  hoarding  and 
traveling  and  other  subtractions,  as,  for  in- 
stance, a  determination  on  the  part  of  capital- 
ists not  to  use  their  money  in  industrial 
undertakings  until  some  financial  policy  has 
been  settled  to  their  liking  or  their  interest — 
as  the  capitalists  of  the  United  States  did  dur- 
ing the  Bryan  campaign — may  reduce  the  stock 
of  gold  in  circulation  below  the  needs  of  the 
people.  Then  prices  would  fall  and  money  flow 
in  and  the  equilibrium  be  restored?  Yes,  if 
everything  in  this  world  were  fluid  to  intelli- 
gence, and  the  needs  of  the  people  and  all  civil- 
ization were  but  one  market,  with  its  frequent- 
ers able  to  know  always  the  movements  in  every 
part,  of  prices  and  goods,  supply  and  demand. 


THE    EVOLUTION    OF    BANKING  71 

This  currency  theory  is  like  that  of  the  mobility 
of  labor,  which  proves  that  when  there  is  a 
slackening  in  the  demand  for  labor  in  one  place, 
the  laborer  has  only  to  go  to  another.  Still, 
laborers  willing  to  work  starve  because  they 
can  not  find  this  other  work  oi*  can  not  get  to 
it.  Of  course  on  the  theory  that  the  supply  of 
gold,  whatever  it  is,  will  always  do  the  business 
of  the  world  as  this  business  ought  to  be  done, 
once  it  is  accepted,  puts  out  of  the  forum  any 
arguments  that  more  money  might  be  needed. 
This  theory  leaves  the  enquirer  perplexed  as 
to  why  the  people  that  hold  it  should  be  so 
eager  in  their  quest  for  gold  in  Mashonaland 
and  the  Transvaal.  The  gold  they  already 
have  must  be  enough  by  the  theory  to  do  their 
business.  Prices  and  the  movements  of  indus- 
try have  adjusted  themselves  to  this  specie 
basis.  It  is  not  hard  to  detect  here  the  same 
metaphysical  and  theological  preconception 
which  we  find  all  through  the  writings  of  most 
of  the  economists.  No  doubt  it  is  true  that 
prices  and  all  commercial  affairs  will  adjust 
themselves  to  the  amount  of  specie,  and  that 
if  it  is  the  only  money  it  will  distribute  itself, 
as  the  bullionists  say,  throughout  the  world  in 
proportion  to  the  demand  for  it.  The  process 
will  require  a  great  deal  longer  time  in  the  slow 


72  THE    EVOLUTION    OF    BANKING 

moving  world,  than  in  their  very  rapid  minds, 
but  it  will  get  itself  done.  But  that  this  is  a 
beneficent  process,  that  it  is  for  the  best,  that 
the  results  vindicate  the  "laws  of  trade"  as 
like  the  other  forces  that  are  making  this  the 
best  of  all  possible  worlds — these,  which  are  the 
underlying  implications,  are  absolutely  unveri- 
fied and  unverifiable.  "When  this  reasoning  is 
examined  in  the  light  of  science  and  culture  it 
becomes  plain  that  here  is  the  same  reactionary 
argument  which  has  been  used  all  through  his- 
tory in  one  shape  or  another  by  the  priests, 
kings,  nobles,  the  invested  classes,  the  ''Chiv- 
alry" who  were  in  the  saddle  and  could  ride 
down  their  defenseless  brethren,  by  the  stupid, 
to  oppose  change.  Those  who  were  conserva- 
tive from  selfishness,  and  those  who  were  so 
from  dullness,  have  always  met  reform  with 
this  argument.  In  the  ordained  nature  of 
things — that  nature  which  the  bullionists  tell 
us  distributes  the  stock  of  specie  as  it  should 
be  distributed — matters  would  go  right  and  as 
a  matter  of  fact  were  going  as  nearly  right  as 
could  be  expected,  considering  that  the  indi- 
vidual regeneration  of  men  was  so  incomplete. 
Such  is  the  talk  with  which  the  creative  genius 
of  the  world  has  been  discouraged  ever  since 
time  began.    One  other  counter  attack  can  be 


THE    EVOLUTION    OP    BANKING  73 

made  on  this  position  of  Jevons.  If  this  was 
a  forced  loan,  and  if  gold  was  driven  out  of 
circulation,  then,  judging  by  results,  forced 
loans  and  driving  gold  out  of  circulation  are 
good  things  to  effect.  Let  us  have  more  of 
them  and  less  of  this  clerical  economy. 

If  at  the  price  of  forced  loans  and  banished 
gold  we  can  put  the  unemployed  at  work,  and 
can  incorporate  iron  and  sand  and  timber  and 
stone  into  institutions  of  lasting  power  to  shel- 
ter and  aid  and  enrich,  if  by  paper  money  and 
paper  laws  we  can  put  an  end  in  this  way  to 
poverty  and  idleness  and  emancipate  the  people 
from  the  burdens  of  perpetual  debt  and  inter- 
est, and  the  eternal  meddling  in  their  legisla- 
tion, lives  and  industry  of  the  "money  power" 
— that  is  of  the  money  lenders,  and  bond  gath- 
erers— by  all  means  let  us  go  on  with  more  of 
this  kind  of  finance.  The  people  of  Guernsey 
could  have  issued  bonds  to  build  their  market 
house.  They  could  have  bound  themselves  for 
thirty  years  to  pay  interest  in  gold  and  at  the 
end  have  had  to  renew  the  loan  for  thirty  years 
more.  They  could  have  made  the  bonds  for 
$30,000,  while  they  received  only  $25,000.  That 
would  have  been  the  "issue  price."  When  the 
market  house  was  sixty  or  seventy  years  old, 
and  about  ready  to  be  pulled  down,  they  would 


74  THE    EVOLUTION    OF    BANKING 

have  still  owed  as  much  as  ever,  though  in  the 
meantime  they  had  paid  back  $90,000  in  inter- 
est— three  times  as  much  as  they  had  borrowed. 
Meanwhile  every  attempt  to  improve  the  cur- 
rency or  to  change  the  regulations  of  the  mar- 
ket or  to  make  any  alterations  in  their  ways, 
that  could  by  any  ingenuity  or  timidity  be  con- 
strued as  involving  danger  to  the  bondholder, 
or  any  threat  of  revolution  or  financial  dis- 
honor would  have  been  the  signal  for  the  de- 
scent on  them  of  a  torrent  of  abuse  from  the 
press  and  pulpit  and  professors  of  the  world; 
their  legislatures  would  have  been  haunted  by 
armies  of  lobbyists  trying  to  get  new  issues  of 
bonds  on  one  pretext  or  another;  their  elec- 
tions would  have  been  taken  in  charge  by  the 
"honest  money"  men,  and  the  principal  activ- 
ity of  their  common  councils  and  executive 
officers  would  become  the  contrivance  of  new 
forms  of  profit-producing  government-made 
privileges  for  these  guardians  of  their  morals 
and  economic  welfare.  As  it  is  the  Guernsey 
market  house  stands  today  free  from  the  bur- 
den of  ever  having  paid  one  day's  interest,  and 
unstained  by  the  intrigues  of  lobbyists  or  priv- 
ilege hunters,  a  monument  to  the  ** beneficence" 
of  a  creative  intelligence  among  the  people 
which  can  set  them  to  co-operating  with  each 


THE   EVOLUTION   OF   BANKING  75 

other  in  an  exchange  which  is  of,  by  and  for 
the  people,  and  embodies  itself  in  work  which 
lasts  to  bless  future  generations,  an  asset  in- 
stead of  a  debt. 

If  the  Guernsey  operation  was  a  "forced 
loan"  on  which  no  interest  was  paid,  as  Jevons 
says,  it  hardly  seems  to  require  argument  that 
the  forced  loan  was  a  very  profitable  thing.  All 
taxation  is  a  forced  loan,  but  when  it  is  taken 
by  the  people  from  themselves  to  be  spent  by 
themselves  for  their  own  benefit,  and  so  wisely 
that  it  does  yield  the  benefits  planned  for,  the 
sting  is  all  taken  out  of  the  **begging-the- 
question"  phrase  "forced  loan."  It  was  a 
good  bargain  for  the  people  to  use  their  own 
money  without  interest  for  a  few  years  if  there- 
by they  saved  themselves  the  payment  of  inter- 
est to  London  for  an  indefinite  number  of  years. 
The  number  of  instances  in  which  people  have 
got  under  a  bonded  debt  and  got  out  again,  in 
which  they  have  been  able  to  pay  up  and  get 
a  release  and  look  upon  themselves  without 
the  appendage  of  a  tail  of  bonds,  is  so  small 
that  there  is  very  little  hope  that  a  people  who 
once  begin  to  give  bonds  will  ever  be  free 
again. 

If  it  is  true  that  when  the  market  house 
money  was  issued,  it  drove  an  equal  amount  of 


76  THE    EVOLUTION    OF    BANKING 

gold  out  of  circulation,  it  must  also  be  true 
that  when  this  paper  was  destroyed,  the  gold 
came  back.  All,  therefore,  that  the  people  had 
to  give  for  a  market  house  which  stands  for- 
ever, was  a  few  years'  absence  of  4,000  Pounds 
Sterling  of  gold.  The  gold  was  not  missed ;  as 
it  went  out,  the  market  house  went  up;  now 
the  people  have  both  their  market  house  and 
the  gold,  according  to  Jevons'  own  theory.  If 
gold  can  do  so  much  good  by  leaving  a  place, 
the  oftener  it  goes  the  better. 

If  the  Guernsey  market  house  had  been  built 
by  the  usual  methods  of  loans  from  bankers 
and  contracts  with  profit-hunting  Captains  of 
Industry,  the  bankers  would  have  had  to  be 
paid  their  price  for  effecting  the  application 
to  this  work  of  the  loanable  capital.  But  by 
the  method  the  people  adopted,  they  saved  this 
charge,  and  it  is  always  a  very  heavy  one.  In 
their  turn  the  contractors  would  have  had  to 
be  paid  their  commissions  or  profits.  These  are 
very  heavy.  But  the  people,  by  making  them- 
selves their  own  contractors,  saved  this.  If  it 
was  a  forced  loan,  it  was  not  so  large  a  loan  as 
the  other  process  would  have  necessitated,  and 
it  was  no  more  forced  than  that.  If  both  meth- 
ods, that  by  taxation,  syndicating  of  bankers 
and  contractors,  and  that  by  the  issue  of  money 


THE    EVOLUTION    OF    BANKING  77 

for  services  and  popular  self-direction  are  both 
forced  loans,  it  is  manifest  that  the  one  kind 
of  forced  loan  is  infinitely  superior  to  the  other. 
One  is  a  forced  loan  which  distributes  wealth, 
the  other  concentrates  it ;  one  increases  popular 
powers  of  self-help,  the  other  diminishes  it; 
one  is  quickly  paid  and  settled,  the  other  is  al- 
most interminable  and,  experience  shows,  often 
grows  the  more  burdensome  the  more  has  been 
paid  on  it.  A  forced  loan  collected  by  the  peo- 
ple from  the  people  and  spent  among  the  people 
is  a  co-operation ;  one  that  is  made  with  the  in- 
termediation of  bankers  and  other  financial 
functionaries  is  a  servitude  putting  the  people 
under  tribute  to  absentee  rulers. 

The  people  may  rest  assured  of  one  thing: 
they  will  never  have  a  currency  which  will  be 
for  the  people  until  it  is  of  the  people.  Not 
until  they  have  mastered  the  work  which  cur- 
rency must  do  and  the  principles  on  which  it 
should  be  provided  will  there  be  a  good  money, 
good  morally  and  economically.  As  long  as  the 
supply  of  currency  is  left  to  **God"  it  will  be 
like  the  other  work  of  inferior  nature,  the  sport 
of  accident  and  mistake,  and  the  product  of  the 
grosser  laws  of  matter  and  force.  Not  until  it 
is  taken  in  hand  by  the  highest  will  that  has 
to  do  with  social  affairs — the  will  of  conscious 


78  THE    EVOLUTION    OF    BANKING 

and  conscientious  men — will  it  rise  in  its  de- 
velopment above  the  slow  and  torturing  evolu- 
tion by  which  the  lower  forms  of  life  have  been 
evolved.  Its  perfect  social  development  will 
not  come  until  it  has  been  brought  under  the 
jurisdiction  of  the  people,  when  there  comes 
to  be  such  a  body.  As  long  as  the  forms  and 
uses  of  money  are  fixed  by  individuals  or 
classes,  so  long  will  these  have  a  class  and  sinis- 
ter purpose  and  effect. 

Money  represents  service.  There  is  no  such 
thing  as  "cold  cash."  Every  dollar  is  a  warm, 
throbbing,  living  product  of  somebody's  toil. 
It  is  because  the  real  significance  of  money  is 
forgotten,  and  we  come  to  regard  it  as  so  much 
gold  metal,  to  be  used  irresponsibly  by  any- 
body who  happens  to  have  possession  of  it,  that 
money  becomes  a  tap-root  of  every  kind  of  evil. 

Money,therefore,  is  a  sacrament,  represent- 
ing the  real  communion  of  man  with  man.  He 
who  uses  it  any  other  way  "drinks  to  himself 
damnation. ' ' 


THE    EVOLUTION     OF    BANKING  79 

FRENCH  ASSIGNATS 

One  of  the  most  prominent  examples  of  the 
use  of  paper  credit  was  the  assignats  issued 
during  the  French  Revolution.  These  have 
often  been  referred  to  by  those  who  uphold  the 
superiority  of  a  metal  coinage  to  show  the 
utter  fallacy  of  anything  serving  as  money  but 
gold  and  silver.  The  gradual  depreciation  of 
the  assignats  and  their  final  disappearance  are 
quoted  as  proof  positive  of  their  utter  worth- 
lessness  from  the  very  beginning. 

The  assignats  were  brought  into  existence 
while  France  was  in  the  throes  of  the  revolu- 
tion. The  nation  under  the  monarchy  had 
become  bankrupt.  Steeped  in  debt,  and  with  an 
insufficient  revenue  to  pay  current  expenses, 
the  finances  of  the  nation  were  in  an  alarming 
condition.  Very  little  money  was  in  circula- 
tion. Trade  was  stagnant  and  labor  was  unem- 
ployed. The  credit  of  the  nation  was  so  low 
that  no  more  loans  could  be  made.  The  States 
General  was  convened  and  declared  itself  to  be 
the  National  Assembly  and  proceeded  to  legis- 
late in  behalf  of  the  masses.  It  consisted  of 
270  of  the  nobility,  291  of  the  clergy  and  584 
of  the  third  estate,  or  representatives  of  the 
people.    The  nobility  and  clergy  united  to  de- 


80  THE    EVOLUTION    OF    BANKING 

mand  that  they  should  legislate  as  a  separate 
and  superior  body,  with  the  intention  to  curb 
and  veto  the  third  estate.  The  latter  openly 
and  firmly  resisted.  They  insisted  that  the 
States  General  should  sit,  not  as  three  bodies, 
but  as  one.  The  deadlock  lasted  nearly  two 
months,  but  finally  the  clergy,  more  politic 
than  the  nobles,  gave  way  and  joined  the  third 
estate.  The  nobility,  humiliated  and  impotent, 
were  compelled  to  capitulate. 

In  the  meanwhile,  France,  and  especially 
Paris,  was  becoming  exasperated  at  the  delay. 
Work  was  scarce,  and  food  even  scarcer.  A 
mob  of  hungry  and  desperate  citizens  attacked 
and  captured  the  Bastile  and  murdered  its 
Governor  and  also  the  Mayor  of  Paris.  An- 
other mob  made  its  way  to  Versailles  and 
forced  Louis  XVI,  Marie  Antoinette,  and  the  Na- 
tional Assembly  to  take  up  their  abode  in  Paris. 
Famine  and  destitution  was  widespread.  Count- 
less numbers  were  in  want  for  the  food  and  the 
common  necessaries  needed  to  support  life. 

The  revolution  was  at  its  height,  but  the 
Revolutionary  party  had  no  money,  not  enough 
to  pay  its  expenses  from  day  to  day.  It  had  no 
credit  and  every  source  of  revenue  was  ex- 
hausted. 

The  Catholic  church  owned  more  than  one- 


THE    EVOLUTION    OF    BANKING  81 

third  of  the  entire  real  property  of  France.  It 
consisted  of  princely  estates  in  the  country, 
sumptuous  palaces  and  buildings  in  the  towns, 
and  had  a  value  of  about  four  thousand  million 
francs  and  yielded  an  annual  income  of  about 
two  hundred  millions.  This  represented  the 
accumulation  of  thirteen  hundred  years.  On 
the  2d  day  of  December,  1789,  it  was  declared 
that  "all  the  lands  of  the  clergy  belonged  to 
the  state." 

Two  weeks  later  a  bill  was  passed  authoriz- 
ing the  issue  of  bills  of  credit  called  "as- 
signats,"  or  mortgages  based  upon  the  lands 
confiscated  from  the  clergy. 

The  first  issue  consisted  of  400,000,000  francs 
and  an  equal  amount  in  value  of  the  lands  Avas 
pledged  for  their  redemption. 

The  church  and  clergy  denounced  these  acts 
as  robbery. 

In  June,  1790,  another  issue  of  400,000,000 
francs  was  authorized,  based  as  before  on  the 
confiscated  lands  of  the  church.  The  church 
and  clergy  seeing  their  lands  being  swallowed 
up  in  the  maelstrom  of  the  revolution  began  a 
campaign  of  disputes,  threats,  and  finally  or- 
ganized opposition.  Joining  with  the  nobility, 
whose  lands  and  estates  were  valued  at  nearly 
as  much  as  those  held  by  the  church,  and  which 


82  THE    EVOLITTION    OF    BANKING 

were  also  confiscated,  they  made  war  on  the 
revolution.  Under  the  cry  of  '*God  and  the 
King"  they  rallied  the  ignorant  and  supersti- 
tious peasantry.  Religious  fanaticism,  coupled 
with  their  devotion  to  their  feudal  masters, 
caused  the  misguided  yeomanry  to  lay  down 
their  lives  by  the  tens  of  thousands.  The  hor- 
rors of  the  civil  war  in  La  Vendee  are  un- 
equaled  in  the  annals  of  human  history. 

A  coalition  was  formed  between  the  Catholic 
clergy  and  the  emigrant  nobility  to  defeat,  if 
possible,  the  revolution  and  restore  the  confis- 
cated lands  to  the  church  and  the  aristocracy. 

The  first  anniversary  of  the  fall  of  the  Bastile 
was  the  occasion  when  the  king  accepted  the 
new  constitution  and  took  the  oath  to  support 
and  defend  it.  The  constitution  gave  the  Na- 
tional Assembly  the  right  to  confiscate  the 
lands  of  the  clergy.  It  was  a  declaration  to  the 
world  that  the  rights  of  man  were  supreme  in 
France  and  that  kingly,  aristocratic  and  eccle- 
siastic power  had  been  overthrown.  A  major- 
ity of  the  clergy,  of  whom  there  were  about 
175,000  in  France  at  the  time,  refused  to  take 
the  oath  to  support  the  constitution.  Those 
who  refused  were  treated  as  enemies  of  the 
revolution,  denied  their  priestly  functions,  and 
deprived    of    support.      They    organized    and 


THE    EVOLUTION    OF    BANKING  83 

made  every  altar,  vestry  and  confessional  a 
rallying  point  of  revolt.  Aristocrats  at  home 
and  abroad  assisted  in  the  work  and  the  kings 
of  Europe,  scenting  danger  to  their  thrones 
from  the  spread  of  republican  ideas,  began  to 
combine  with  a  view  to  interference.  Specu- 
lators in  food  joined  with  the  nobility  and 
clergy.  Famine  was  widespread  and  food  was 
difficult  to  procure  even  by  those  who  had 
money.  Against  these  three  evils — anarchy, 
famine  and  counter-revolution — the  govern- 
ment of  France  had  to  fight  its  way.  The  as- 
signat  was  its  savior,  just  as  the  continental 
currency  had  saved  the  American  revolution 
fifteen  years  before. 

The  coalesced  kings  of  Europe  began  their 
preparations  for  the  invasion  of  France  with 
the  intention  of  partitioning  it  among  them- 
selves just  as  Poland  had  been. 

To  resist  foreign  invasion,  an  army  was 
needed.  The  republic  raised  the  army  and  it 
was  armed,  equipped  and  fed  by  means  of  the 
assignats.    They  were  its  sole  financial  reliance. 

In  the  midst  of  the  utter  confusion  that 
reigned,  the  king  and  his  family  attempted  to 
escape  from  France  and  take  refuge  with  the 
army  of  the  king  of  Prussia,  but  was  captured 
and  brought  back  a  prisoner. 


84  THE    EVOLUTION    OF    BANKING 

War  was  inevitable.  To  prepare  for  the  im- 
pending struggle,  which  was  certain  to  be  a 
titanic  one,,  an  issue  of  800,000,000  of  francs  in 
assignats  was  authorized. 

Mirabeau,  who  previously  had  used  his  im- 
mense influence  against  them,  declared  that 
this  was  not  a  matter  of  choice,  but  a  measure 
demanded  by  necessity. 

The  assembly,  in  legalizing  the  issue,  de- 
clared that  all  debts  of  the  government  should 
be  paid  in  them  and  that  as  fast  as  they  were 
paid  back  to  the  government  for  taxes  or  in 
payment  for  land,  they  should  be  destroyed, 
and  that  no  more  would  be  issued  than  there 
remained  of  the  public  domain  as  security  for 
their  redemption,  and  that  the  amount  in  circu- 
lation should  at  no  time  exceed  twelve  hundred 
million  of  francs. 

The  marshaling  of  the  armies  of  Europe  on 
the  frontiers  of  France  intent  on  invasion,  and 
the  known  hostility  of  the  king,  the  nobility 
and  the  non-juring  clergy,  drove  the  people  to 
a  frenzy,  and,  on  the  10th  of  August,  1792, 
they  deposed  and  imprisoned  the  king. 

The  march  of  invasion  began  and  threw 
France  into  a  frenzy  of  patriotic  and  revolu- 
tionary zeal.  The  south  and  the  west  of  France 
was  ravaged  by  civil  war  between  the  revolu- 


THE    EVOLUTION     OF    BANKING  85 

tionary  forces  on  the  one  hand  and  the  pious 
peasants  who  still  retained  their  loyalty  to  the 
feudal  lords,  led  by  priests  and  nobles,  on  the 
other. 

France  was  a  huge  military  camp.  Peaceful 
pursuits  were  almost  wholly  abandoned  and 
the  citizens  almost  en  masse  threw  themselves 
upon  the  foreign  invaders  and  drove  them  from 
the  soil  of  France.  Belgium  was  overrun  and 
declared  a  republic.  The  estates  of  the  nobil- 
ity were  confiscated  and  were  added  to  the 
estates  taken  from  the  Catholic  church  and  thus 
made  to  strengthen  the  credit  of  the  republic. 

The  Legislative  Assembly  that  succeeded  the 
National  Assembly  took  its  seat  October  1,  1791, 
and  from  the  beginning  was  torn  by  factions.  It 
consisted  almost  entirely  of  middle  class  repre- 
sentatives. The  extreme  right  was  composed  of 
a  few  who  were  only  mildly  revolutionary  and 
who,  while  professing  to  be  satisfied  with  the 
changes — such  as  the  abolition  of  serfdom, 
wrought  by  the  Revolution,  desired  a  king  on 
the  throne  with  limited  powers.  The  center,  or 
Girondists,  were  extreme  republicans.  Eloquent, 
cultured,  and  many  of  them  very  rich,  they  de- 
sired, as  Carlyle  expresses  it,  a  republic  of  the 
virtues  in  which  they  would  rule,  but  were 
doomed  to  the  harsh  fate  of  seeing  a  republic 


86  THE    EVOLUTION    OP    BANKING 

of  the  strengths,  virtuous  or  otherwise,  in  which 
others  ruled.  They  represented  the  elements  in 
society  of  that  time  that  can  fairly  be  compared 
with  the  elements  which  made  up  the  Progressive 
Party  in  America.  The  left,  or  Mountain  Party, 
while  few  in  numbers,  were  strong  in  their 
hatred  for  the  old  regime  and  were  impatient 
over  the  long  debates  and  hair  splitting  theories 
of  the  other  members  of  the  assembly. 

They  were  essentially  men  of  action  and  were 
the  idols  of  the  working  class,  who  had  fought 
and  suffered  so  much  for  the  Revolution.  To 
them  oratory,  with  high  sounding  phrases  and 
fine  spun  theories,  was  no  substitute  for  food. 
The  masses  of  the  people  were  cold,  hungry,  and 
ragged,  and  the  Revolution  meant  nothing  if 
these  conditions  were  to  continue,  no  matter  what 
political  form  it  took. 

Bitterness,  hatred  and  the  desire  for  revenge 
resulted  from  the  clash  of  these  factions.  The 
first  faction  to  disappear  was  the  extreme  right, 
leaving  the  field  to  the  Girondists  and  the  Moun- 
tain. 

The  king  was  accused,  tried  and  beheaded. 
The  two  contending  factions  faced  each  other 
for  the  battle. 

The  Girondists  were  well  meaning,  but  weak 
in  that  they   were   unable   to   understand   the 


THE    EVOLUTION    OF    BANKING  87 

forces  that  brought  on  the  Revolution.  The 
Mountain  was  strong  in  its  uncompromising  sin- 
gleness of  purpose.  To  them  hunger,  cold  and 
wretchedness  were  concrete  realities  and  not 
mere  abstract  theories.  The  convention  was  over- 
whelmed again  and  again  by  the  Parisian  mob 
crying  for  bread. 

The  Mountain  gained  in  strength  while  the 
Girondists  lost,  and  at  length  the  convention  cre- 
ated the  Revolutionary  Tribunal  and  the  Com- 
mittee of  Public  Safety.  This  sounded  the  doom 
of  the  Girondists.  Arrested,  tried  and  guillo- 
tined, their  numbers  dwindled.  Many  of  them 
sought  safety  in  flight,  but  were  hunted  like 
wild  beasts.  Some  succeeded  in  escaping  to  other 
countries,  but  the  unfortunate  ones  were  caught 
and  beheaded. 

The  Reign  of  Terror  was  in  full  swing  with 
Robespierre  as  its  leader.  The  Mountain  Party 
was  divided.  Rabid  members  denounced  the 
moderates,  and  accusations  of  treason  were 
launched  upon  the  flimsiest  pretext.  To  be  ac- 
cused meant  certain  death,  as  the  trials  were 
travesties  on  justice.  One  by  one  the  leaders 
of  the  Revolution  were  exterminated. 

During  these  months  of  terror  the  Conven- 
tion sat  paralyzed  with  fear.  At  length,  with 
a  courage  born  of  desperation,  they  declared 


THE    EVOLUTION    OF    BANKING 


Robespierre  an  outlaw  to  be  guillotined  without 
trial.  He  was  seized,  but  rescued  by  the  Paris 
mob,  retaken  and  beheaded  on  July  26,  1794. 

The  amount  of  assignats  from  the  time  that 
the  first  issue  was  authorized  in  December,  1789, 
was  increased  from  time  to  time  until  the  amount 
in  circulation  January  1,  1794,  was  5,536,000,000 
francs  or  $1,107,000,000.  The  value  of  the  lands 
confiscated  from  the  nobility  and  clergy  and  held 
as  security  for  their  redemption  was  15,000,- 
000,000  francs,  or  $3,000,000,000.  This  hasty  re- 
view of  the  events  of  the  four  fateful  years  gives 
but  a  faint  idea  of  the  tremendous  burden 
thrown  upon  the  people  of  France.  With  a 
Revolutionary  government  in  control  of  affairs, 
beset  by  armed  foes  from  without  and  traitors 
at  home,  it  performed  prodigies  of  valor.  In 
spite  of  all  the  internal  dissensions  it  maintained 
thirteen  armies  in  the  field,  comprising  more  than 
one  million  of  men,  and  single  handed  defeated 
the  allied  armies  of  five  European  nations,  all 
of  whom  were  on  the  soil  of  France  at  the  same 
time.  It  defeated  the  armies  of  the  reactionary 
elements  at  home  that  waged  Civil  War  for  the 
purpose  of  re-establishing  the  feudal  system  and 
restoring  the  lands  to  the  nobility  and  clergy. 

During  this  titanic  struggle,  gold  and  sil- 
ver had  disappeared.     The  paper  assignat  was 


THE    EVOLUTION    OF    BANKING  89 

the  oiily  money.  Without  it  the  Revolution 
would  have  been  helpless  and  impotent.  With 
it  the  Revolution  overcame  its  enemies  at  home 
and  abroad.  Every  means  that  chicanery  or  dis- 
honesty could  devise  were  used  by  the  enemies 
of  the  Republic  to  discredit  and  destroy  the 
assignat. 

The  Clergy  denounced  to  eternal  pains  every 
communicant  of  the  church  who  sustained  the 
spoliation  of  the  church,  and  the  nobility  and 
clergy  united  in  denouncing  the  assignat  as  based 
upon  theft,  sacrilegious  robbery  and  impious 
outrage  upon  the  charities  of  the  church. 

They  declared  that  their  lands  had  been  ap- 
propriated by  the  Revolution  without  any  of  the 
forms  of  law,  and  in  such  flagrant  outrage  of 
all  recognized  codes  of  property  that  the  civil- 
ized world  held,  that  the  titles  still  remained  in 
the  clergy  and  nobility. 

They  pledged  their  lives,  their  religion  and 
their  honor  never  to  cease  agitation  and  war  on 
the  Assignat,  its  credit,  and  the  robbery  on  which 
it  was  based.  But  in  spite  of  the  opposition  the 
Revolution  was  stronger  than  its  enemies.  The 
successes  of  its  armies,  armed,  equipped  and 
maintained  in  the  field  through  the  use  of  the 
Assignat,  carried  fear  into  every  nation  in  Eu- 
rope. 


90  THE    EVOLUTION    OF    BANKING 

Failing  to  destroy  the  credit  of  the  assignat 
by  appeals  to  passion  and  prejudice  they  sought 
to  accomplish  the  same  result  by  stealth. 

Shortly  after  the  third  issue  of  assignats  in 
September,  1790,  adventurers  in  Belgium  and 
priests  in  Switzerland  began  to  issue  counter- 
feits that  so  closely  resembled  the  genuine  notes 
as  to  deceive  any  one  except  an  expert.  But 
these  two  countries  were  too  small  to  offer  the 
necessary  opportunity  for  extended  operations. 
London  offered  a  field  where  the  manufacture 
could  be  carried  on  without  fear  of  interruption. 

Seventeen  establishments  were  in  full  blast 
in  London,  employing  four  hundred  men  en- 
gaged in  the  production  of  false  and  forged  as- 
signats. 

In  May,  1795,  it  was  found  that  there  were 
in  circulation  between  12,000,000,000  and  15,- 
000,000,000  francs  of  forged  assignats.  At  that 
time  the  assignats  in  circulation  that  were  is- 
sued by  the  Revolutionary  government  amounted 
to  7,860,000,000  francs.  Two  out  of  every  three 
of  the  bills  in  circulation  were  fraudulent,  but 
were  so  perfect  an  imitation  that  it  was  next  to 
impossible  to  detect  the  difference.  No  paper 
currency  ever  issued  could  be  maintained  under 
such  conditions.  The  wholesale  business  of 
printing  and  circulating  the  forged  assignats  was 


THE    EVOLUTION    OF    BANKING  91 

carried  on  under  the  direction  of  Count  d ' Artois 
(a  brother  of  Louis  XVI  and  afterwards  Charles 
the  Tenth).  He  was  assisted  by  Count  Puisaye 
and  Bishop  Dol  and  by  a  host  of  Catholic  priests 
still  residing  in  France. 

Catholicism  was  the  dominant  religion  in 
France  and  in  every  parish  there  were  numer- 
ous communicants  who  felt  that  an  outrage  had 
been  committed  on  the  Church  in  confiscating 
its  lands  and  who  were  willing  assistants  in  the 
work  of  circulating  the  counterfeits.  The  noble 
and  priestly  scoundrels  who  were  engaged  in 
this  infamous  traffic  quieted  their  consciences 
by  claiming  that  the  assignats  issued  by  the  gov- 
ernment were  based  upon  land  confiscated  from 
the  church,  which  act  they  denounced  as  rob- 
bery and  that  genuine  notes  had  no  foundation 
in  law  or  morals.  They  claimed  the  right  under 
the  laws  of  war  to  recover  the  property  taken 
from  them  and  to  weaken  the  enemy  by  any 
means  in  their  power. 

Rumors  that  large  amounts  of  assignats  were 
being  forged  and  circulated  reached  the  ears 
of  the  revolutionary  leaders,  but  they  at  first 
refused  to  credit  them.  To  admit  it  would  bring 
all  outstanding  issues  into  discredit.  Every  de- 
vice known  to  the  stock  jobbers  and  speculators 
was  used  against  the  assignats.    The  rumor  that 


92  THE    EVOLmON    OF    BANKING 

forgeries  were  in  circulation  and  the  subsequent 
denials  caused  wide  fluctuation  in  prices  and 
enabled  the  speculators  to  reap  large  profits. 

Eumors  of  impending  defeat  of  the  Revolu- 
tion and  the  return  of  the  confiscated  lands  to 
their  former  owaiers  were  also  widely  circulated. 
The  forces  of  reaction,  the  stock  jobbers,  gam- 
blers, priests  and  nobles,  together  with  the  fact 
that  could  no  longer  be  denied  that  less  than  one- 
half  of  the  assignats  in  circulation  were  genu- 
ine, caused  the  people  to  begin  to  lose  faith,  and 
this  mental  condition  it  was  impossible  to  con- 
trol.   The  end  was  in  sight. 

With  the  downfall  and  death  of  Robespierre 
the  Revolution  may  be  said  to  have  ended.  The 
assignats  fell  to  six  cents  on  the  dollar. 

The  reactionists  secured  power  and  began  a 
relentless  warfare  on  the  radical  element.  They 
revoked  the  decree  that  expelled  the  nobility 
and  clergy  from  France  and  restored  to  the  non- 
juring  clergy  their  rights  to  worship  in  the 
churches  of  which  they  had  been  deprived.  Paris 
was  in  a  ferment,  and  mobs  with  the  cry  for 
bread  and  work  tried  to  stay  the  counter-revolu- 
tion. They  attacked  the  Convention,  but  were 
defeated  and  dispersed.  They  were  disarmed 
and  the  arms  taken  from  them  were  used  against 
them  with  bloodthirsty  ferocity. 


THE   EVOLUTION   OF    BANKING  93 

The  Convention  by  a  general  act  restored  the 
confiscated  lands  to  the  families  of  all  persons 
condemned  by  the  Revolution  so  far  as  such 
lands  had  not  passed  into  the  possession  of 
purchasers  under  the  decree  upon  which  the  as- 
signats  were  issued. 

This  took  from  under  the  assignats  the  basis 
for  their  redemption  and  left  them  without  sup- 
port except  that  they  could  be  used  to  a  certain 
extent  in  the  payment  of  taxes  and  in  payment 
for  unclaimed  lands  not  restored  to  the  former 
owners  who  had  disappeared  and  could  not  be 
located.  But  the  value  of  these  lands  did  not 
exceed  the  one  hundredth  part  of  the  amount  in 
circulation. 

The  Convention  submitted  a  new  constitution 
to  the  people,  which  was  accepted  by  them,  but 
which  did  not  please  the  Royalists.  They  com- 
bined with  the  Sections  of  Paris  to  overthrow  it, 
but  Napoleon  was  given  charge  of  the  armed 
forces  of  the  Convention  and  with  his  "Whiff 
of  Grape  Shot"  secured  the  control  of  France 
to  the  middle  class. 

During  the  fifteen  months  between  the  death 
of  Robespierre  and  the  victory  of  Napoleon  there 
were  5,000,000,000  francs  of  assignats  issued 
without  regard  to  the  obligations  they  created. 
The  Directory  was  given  a  credit  of  3,000,000,- 


94  THE   EVOLUTION   OF   BANKING 

000  francs  for  expenses,  but  they  could  not 
realize  one  franc  in  coin  for  one  hundred  as- 
signats.  They  were  compelled  to  rely  on  forced 
loans  and  on  the  war  indemnities  Napoleon's 
victories  wrung  from  the  conquered  nations  of 
Europe.  The  discredit  of  the  assignats  was  com- 
plete. 

The  Directory  tried  to  substitute  for  them  a 
paper  currency  known  as  Mandats.  They  were 
based  on  the  lands  that  actually  belonged  to  the 
nation.  They  were  legal  tender  and  receivable 
for  all  public  dues.  It  was  intended  to  pur- 
chase with  them  the  outstanding  assignats  at 
their  market  value,  which  was  about  one  cent  or 
less  on  the  dollar.  Land  was  worth  only  about 
one-half  what  it  was  in  1790  and  the  Mandat 
fell  accordingly.  They  fluctuated  between  80 
and  15  cents  on  the  dollar,  and  never  circulated, 
but  were  bought  up  by  land  speculators. 

Their  issue  was  a  failure.  Their  career  lasted 
only  four  months,  from  March  16th  to  July 
16th,  1796.  After  that  they  were  ignored,  the 
government  refusing  to  receive  them  for  taxes 
or  payments  on  land  except  at  the  current  rate, 
which  was  from  five  to  eight  cents  on  the  dollar. 

This  closes  a  brief  history  of  the  paper  money 
issued  by  the  revolutionary  forces  in  France  be- 
tween 1789  and  1795.     It  ought  to  satisfy  any 


THE   EVOLUTION    OP   BANKING  95 

reasonable  mind  that  the  failure  was  not  due 
to  any  inherent  defect  in  a  paper  money  as  such, 
but  was  on  account  of  the  extraordinary  condi- 
tions that  prevailed  and  to  the  malicious  and 
infamous  methods  used  by  powerful  elements 
and  which  were  finally  successful. 

But  the  Revolution,  with  the  financial  aid  of 
the  assignats  based  on  land  confiscated  from  the 
idle  classes,  overthrew  the  monarchy  and  es- 
tablished constitutional  liberty  and  civil 
equality.  It  freed  twenty-five  million  serfs,  and 
6,000,000  owners  of  the  soil  took  the  place  of  a 
landed  aristocracy  of  150,000. 


96  THE   EVOLUTION    OF   BANKING 


STATE  BANKS  IN  AMERICA 

Before  the  Civil  War  the  state  banks  oper- 
ated under  charters  granted  by  the  State  in 
which  the  bank  was  located.  Bank  charters 
were  considered  as  one  of  the  spoils  of  partisan 
politics  and  were  often  granted  by  the  party  in 
power  to  politicians  as  a  reward  for  party 
activity. 

In  some  instances  the  state  held  a  portion  of 
the  capital  stock.  The  State  of  South  Carolina 
owned  all  of  the  capital  stock  of  the  Bank  of 
the  State  of  South  Carolina  and  its  officers  and 
directors  were  elected  by  the  Legislature. 

The  banks  received  deposits,  discounted  mer- 
chants' notes,  and  loaned  money  to  land  own- 
ers on  mortgage  security  and  dealt  in  domestic 
and  foreign  exchange.  They  had  the  right  to 
issue  circulating  notes  to  the  amount  of  two  or 
three  times  their  capital  stock.  Their  bills  were 
redeemable  on  demand  in  coin — that  is,  gold  or 
silver,  whichever  was  most  convenient.  A  re- 
serve of  about  33  1-3  per  cent  was  maintained 
by  the  better  class  of  banks,  but  others  kept 
but  10  per  cent  or  even  less. 


THE   EVOLUTION    OF   BANKING  97 

There  was  no  adequate  supervision  and  the 
laws  enacted  for  their  control  were  loosely  en- 
forced. Some  of  the  charters  were  secured  by 
unscrupulous  men  who  ignored  or  evaded  the 
laws  and  who  issued  bank  notes  without  the 
capital  stock  being  paid  in  full,  and  in  the  case 
of  some  banks  no  capital  at  all  was  provided. 
They  made  loans  to  themselves  or  their  friends 
and  relatives  on  insufficient  security,  main- 
tained only  a  small  reserve,  and  at  the  first  sign 
of  trouble  the  bank  broke,  leaving  unpaid  de- 
positors and  noteholders,  and  bringing  other 
banks  and  bank  notes  into  disrepute. 

Other  charters  were  granted  to  men  who 
were  well  meaning  and  honest  but  weak  and 
inexperienced,  and  who  were  easily  induced  to 
loan  the  credit  of  the  bank  for  hazardous  and 
speculative  enterprises.  These  banks  failed  as 
the  others  did. 

There  were,  at  the  outbreak  of  the  Civil  War, 
about  1500  state  banks  in  existence  issuing 
bank  bills.  The  bills  of  no  two  banks  were 
similar  in  makeup  and  design,  and  the  bills  of 
1250  of  these  banks  were  counterfeited.  There 
were  nearly  5000  alterations  and  imitations  of 
various  kinds,  and  in  addition  bills  of  nearly 
1700  banks  were  circulating  that  purported  to 


98  THE  EVOLLTION   OF  BANKING 

be  issued  by  banks  located  in  towns  that  really 
had  no  existence — and  many  bills  were  issued 
by  institutions  having  little  or  no  paid  up  cap- 
ital, and  which  never  expected  to  redeem  them. 

Is  it  any  wonder  that  this  was  called  the  era 
of  "Wild  Cat"  and  ''Coon  Box"  banks  and 
that  the  money  was  dubbed  "Wild-Cat,"  "Red- 
dog"  and  "Stump-tail"  money? 

But  even  if  no  charters  had  fallen  into  the 
hands  of  weak  or  unscrupulous  men,  but  had  all 
been  secured  by  shrewd  and  capable  men  of 
high  character  and  who  were  faithful  to  every 
trust  reposed  in  them,  and  no  counterfeit,  or 
altered  bills,  or  bills  of  fictitious  banks  had 
been  in  circulation,  the  system  was  bound  to 
fail  by  reason  of  a  fundamental  error  in  the 
structure. 

The  charters  of  these  state  banks  gave  them 
the  right  to  issue  circulating  bills  to  the  amount 
of  twice,  and  in  some  cases,  three  times  the 
capital  of  the  bank  and  to  receive  deposits, 
which  liabilities  they  were  obligated  to  redeem 
in  coin,  i.  e.,  gold  or  silver  on  demand. 

The  condition  of  the  banks  in  the  panic  years 
of  1837  and  1857  is  shown  in  the  Report  of  the 
Controller  of  the  Currency  for  1911 — page  814, 
table  106 — and  is  as  follows : 


THE   EVOLUTION   OF   BANKING  99 

Panic  Year  of  1837: 

Circulating  notes   outstanding $149,185,000.00 

Specie  on  hand  to  redeem  same 37,915,000.00 

Reserve,  25  per  cent. 

Circulating  notes  outstanding $149,185,000.00 

Due  depositors  127,397,000.00 

Total  demand  liabilities $276,582,000.00 

On  hand  to  redeem  the  same: 

Specie    $  37,915,000.00 

Bills  of  other  banks 36,533,000.00 

Specie  funds  5,306,000.00 

Total    $  79,754,000.00 

Reserve,  29  per  cent. 

Panic  year  of  1857: 

Circulating  notes   outstanding $214,778,000.00 

Specie  on  hand  to  redeem  same 58,349,000.00 

Reserve,  27  per  cent. 

Circulating  notes  outstanding $214,778,000.00 

Due  depositors    230,251,000.00 

Total    $445,129,000.00 

On  hand  to  redeem  the  same: 

Specie    $  58,349,000.00 

Specie  funds  25,081,000.00 

Bills  of  other  banks 28,124,000.00 

Total    $111,554,000.00 

Reserve,  25  per  cent. 

Of  course  these  banks  had  other  assets,  but 

they  were  in  the  form  of  notes,  real  estate, 

mortgages,  etc.     But  these  could  not  be  used 

during  a  panic,  as  months  and  perhaps  years 

would  ensue  before  they  could  be  realized  on. 


100  THE   EVOLUTION   OF   BANKING 

"When  a  run  on  a  bank  occurred  the  specie  on 
hand  would  be  withdrawn  and  hoarded  by  the 
public,  and  when  the  reserve  was  exhausted, 
the  bank  closed  its  doors.  This  result  was  in- 
evitable. While  a  cash  reserve  of  25  or  30  per 
cent  was  undoubtedly  sufficient  to  transact  an 
ordinary  day 's  business  in  the  bank,  panic  days 
are  extraordinary  days  and  no  debtor,  bank  or 
merchant  can  pay  on  demand  one  dollar  of 
debts  with  thirty  cents  or  less  in  mone3^ 

The  banks  brought  ruin  on  themselves  by 
promising  to  do  what  they  knew  they  could  not 
do  if  called  upon. 

The  year  1847  was  called  a  good  year — ex- 
ports amounted  to  $158,000,000 — and  the  net 
gain  by  this  country  in  specie  importations  was 
$22,000,000.  And  yet  the  condition  of  the 
banks  was  not  extraordinarily  different  from 
the  panic  year  of  1837,  which  preceded  it,  and 
the  panic  year  of  1857,  which  followed.  The 
year  of  1847  could  and  would  have  been  a 
panic  year  if  the  noteholders  and  depositors 
had  made  a  run  on  the  banks  and  demanded 
the  specie  which  they  were  entitled  to  accord- 
ing to  the  banks'  promises. 

In  1837  the  banks  had  four  times  the  amount 
of  bills  outstanding  that  they  had  specie  to 
redeem  them  with,  while  in  1847  they  had  three 


THE   EVOLUTION    OF   BANKING  101 

times  as  many ;  and  when  we  take  into  consid- 
eration the  total  amount  of  demand  liabilities 
and  the  quick  cash  assets  on  hand  to  redeem 
them  with,  the  difference  between  the  two 
years  is  only  the  margin  between  31  per  cent 
and  29  per  cent. 

CONDITION  OF  AMERICAN  BANKS 

(Taken  from  the  Report  of  the  Controller  of 

the  Currency  for  the  year  1911,  Page  814.) 

PANIC  YEAR  OF  1837. 

Condition  of  Banks.    788  Banks  Reporting. 

Circulating  notes   outstanding $149,185,890.00 

Due  to  depositors 127,397,185.00 

Total    amount   payable    in    coin    on 

demand    $276,583,075.00 

Specie  and  bills  of  other  banks  on 
hand  with  which  to  pay  above  lia- 
bilities        79,835,267.00 

or  29  per  cent. 

GOOD  YEAR  OF  1847. 

Condition  of  Banks.    715  Banks  Reporting. 

Circulating  notes  outstanding $105,519,000.00 

Due  to  depositors 91 ,792,000.00 

Total    amount   payable    in    coin    on 

demand    $197,311,000.00 

Specie  and  bills  of  other  banks  on 
hand  with  which  to  pay  above  lia- 
bilities       62,093,000.00 

or  31  per  cent. 


102  THE   EVOLUTION    OF   BANKING 

PANIC  YEAR  OF  1857. 

Condition  of  the  Banks.    1416  Banks  Reporting. 

Circulating  notes  outstanding $214,778,822.00 

Due  to  depositors 230,351,352.00 

Total    amount    payable   in    coin    on 

demand   $445,130,174.00 

Bills  of  other  banks  and  specie  on 
hand  with  which  to  pay  above  lia- 
bilities   $111,555,487.00 

or  25  per  cent. 

YEAR  OF  1863. 

The  National  Banking  Act  was  passed  in  this  year 
and  the  Civil  War  had  been  in  progress  for  two 
years. 

Condition  of  the  Banks.    1466  Banks  Reporting. 

Circulating  notes  outstanding $238,677,218.00 

Due  to  depositors 393,686,226.00 

Total    amount   payable    in   coin    on 

demand   $632,363,444.00 

Bills  of  other  banks  and  specie  on 
hand  with  which  to  pay  above  lia- 
bilities   $205,563,215.00 

or  32  per  cent. 


THE   EVOLUTION    OF   BANKING  103 


PANIC  YEAR  OF  1873. 

Condition  of  National  Banks  on  Sept.  12,  1873.    1976 
Banks  Reporting. 

The  monetary  panic  of  that  year  began  five  days 
later,  on  September  17,  and  the  disastrous  effects 
were  felt  in  this  country  and  Europe  for  many  years 
afterward. 

(See  Report  of  the  Controller  of  the  Currency  for 
1911,  Page  333.) 

Due  depositors   $622,685,563.00 

Due  U.  S.  treasurer 15,927,827.00 

Total  amount  payable  in  currency 

on  demand  $638,613,390.00 

Cash   and   clearing  house   checks   on 

on  hand $219,723,752.00 

Due  from  U.  S.  treasurer 20,610,000.00 

Total $240,333,752.00 

or  37  per  cent. 

YEAR  OF  1883. 

Condition  of  the  National  Banks  on  October  2.    2501 
Banks  Reporting. 

Due  depositors $1,049,437,700.00 

Due  U.  S.  treasurer 14,164,455.00 

Total  amount  payable  in  cash  on 
demand   $1,063,602,155.00 

Cash  and  clearing  house  checks $   297,963,590.00 

Due  from  U.  S.  treasurer 26,566,712.00 

Total    $    324,520,302.00 

or  30  per  cent. 


104  THE   EVOLUTION    OF   BANKING 

PANIC  YEAR  OF  1893. 

Condition  of  the  National  Banks  May  4,  1893.    3830 
Banks  Reporting. 

Due  depositors $1,749,930,817.00 

Due  U.  S.  treasurer 13,950,982.00 

Total    $1,763,881,799.00 

Cash  and  clearing  house  checks  on 

hand    $    446,749,173.00 

Due  from  U.  S.  treasurer 21,154,880.00 

Total    $    467,903,953.00 

or  26  per  cent. 


PANIC  YEAR  OF  1903. 

Condition  of  the  National  Banks  Sept.  9,  1903.    5042 
Banks  Reporting. 

Due  depositors  $3,156,333,499.00 

Due  U.  S.  treasurer 146,615,000.00 

Total    $3,302,948,499.00 

Cash  and  clearing  house  checks  on 

hand    $    730,096,062.00 

Due  from  U.  S.  treasurer 21,342,184.00 

Total    $    751,438,184.00 

or  23  per  cent. 


THE   EVOLUTION    OF   BANKING  105 

PANIC  YEAR  OF  1907. 

Condition  of  the  National  Banks  May  20,  1907.    6429 
Banks  Reporting. 

Due  depositors $4,322,880,141.00 

Due  U.  S.  treasurer 180,678,309.00 

Total   $4,503,558,450.00 

Cash  and  clearing  house  checks  on 

hand    $    994,995,887.00 

Due  from  U.  S.  treasurer 31,673,714.00 

Total    $1,026,669,601.00 

or  23  per  cent. 

YEAR  OF  1910. 

Condition  of  the  National  Banks  June  30,  1910.    7145 
Banks  Reporting. 

Due   depositors $5,287,216,312.00 

Due  U.  S.  treasurer 54,541,348.00 

Total    $5,341,757,660.00 

Cash  and  clearing  house  checks  on 

hand    $1,294,107,094.00 

Due  from  U.  S.  treasurer 42,433,572.00 

Total    $1,336,540,666.00 

or  25  per  cent. 


106  THE  EVOLUTION   OF   BANKING 


YEAR  OF  1911. 

Condition  of  the  National  Banks  June  7,  1911.    7277 
Banks  Reporting. 

Due  depositors $5,477,991,156.00 

Due  U.  S.  treasurer 48,455,641.00 

Total    $5,526,446,797.00 

Cash  and  clearing  house  checks  on 

hand    $1,239,542,218.00 

Due  from  U.  S.  treasurer 42,525,336.00 

Total    $1,282,067,554.00 

or  23  per  cent. 

Condition  of  National,   State,  Savings,  and  Private 

Banks  and  Loan  and  Trust  Companies.     (Table 

86,  Page  786,  Report  of  the  Controller 

of  the  Currency,  1911.) 

Due  individual  depositors $  8,307,913,874.00 

Due  savings  depositors 5,445,724,306.00 

Due  U.  S.  treasurer 48,455,641.00 

Cert's  of  deposit  outstanding 1,894,840,264.00 

Certified  checks  outstanding 161,596,617.00 

Cashiers'  checks 96,199,647.00 

Total  due  to  the  public $15,954,730,349.00 

Cash  on  hand: 

Gold   coin $  232,842,276.00 

Gold  certificates 623,583,300.00 

Silver  dollars 24,923,135.00 

Silver   certificates 194,474,846.00 

Fractional  silver,  etc 34,852,572.00 

U.  S.  legal  tender  notes 248,334,727.00 

National  bank  notes 105,240,916.00 

Clearing  house  checks 363,576,911.00 

Cash  not  classified 89,889,296.00 

Total  cash $  1,917,717,979.00 

or  12  per  cent. 


THE   EVOLUTION   OF   BANKING  107 

The  circulation  statement  issued  by  the  Sec- 
retary of  the  Treasury  shows  the  stock  of 
money  in  the  United  States  on  March  1,  1912, 
to  be  $3,621,117,239.00,  or  22.7  per  cent  of  what 
the  banks  owe  the  public.  The  banks  owe  the 
public  four  and  one-half  times  as  much  as  they 
could  pay  in  cash  on  demand  even  if  they  had 
all  the  money  in  the  United  States  in  their 
vaults,  while  as  a  matter  of  fact  they  have  less 
than  half  of  it. 

But  these  figures  are  capable  of  still  further 
analysis.  There  are  in  the  United  States  over 
25,000  banks.  Of  this  number  about  7,300  are 
national  banks  and  between  18,000  and  19,000 
are  state  or  private  banks.  By  deducting  the 
amount  of  the  deposits  and  cash  of  the  national 
banks  from  the  totals  as  shown  in  the  above 
table  we  will  ascertain  the  condition  of  the 
banks  other  than  national  banks. 

Total  amount  due  the  public  by  all 
banks    $15,954,730,349.00 

Less  amount  due  the  public  by  na- 
tional banks   5,526,446,797.00 

Balance  due  the  public  from 
18,000  banks  other  than  national 
banks $10,428,283,552.00 

Total  cash  on  hand  in  all  banks $  1,917,717,979.00 

Less  cash  on  hand  in  national  banks     1,282,067,554.00 

Total  cash  on  hand  in  18,000  banks 

other  than  national  banks $     635,650,425.00 

or  a  cash  reserve  of  only  6  per  cent. 


108  THE   EVOLUTION    OF   BANKING 

THE  BANK  OF  THE  STATE  OF  SOUTH 
CAROLINA 

The  financial  history  of  the  United  States 
from  the  time  of  the  adoption  of  the  coinage 
act  in  1792  to  1860  ought  to  convince  the  most 
skeptical  of  the  impossibility  of  an  expanding 
nation  maintaining  a  specie  basis  for  its  com- 
mercial transactions.  It  also  exposes  com- 
pletely the  fallacy  that  a  legal  enactment  can 
establish  a  fixed  and  unchangeable  price  for 
gold  and  silver  and  that  the  relative  value  of 
these  two  metals  will  also  remain  unchanged. 

This  coinage  act  fixed  the  mint  price  of  the 
two  precious  metals  in  the  money  of  account, 
and  also  fixed  the  relative  value  of  gold  and 
silver.  It  declared  the  value  of  one  pound  of 
gold  to  be  the  same  as  fifteen  pounds  of  silver. 
Col  well  says:  "In  this  congress  acted  in  ac- 
cordance with  prevalent  opinions  of  the  day, 
opinions  not  entirely  surrendered  by  many, 
even  at  this  time.  It  is  obvious,  however,  that 
the  proportion  of  gold  and  silver  cannot  be 
settled  by  statutory  regulation.  It  must  remain 
subject  to  the  course  of  trade,  and  whatsoever 
else  infiuences  the  market  price  of  one  or  the 
other  of  these  two  metals. ' ' 

This  enactment  undervalued  gold,  and  it  con- 


THE   EVOLUTION    OF   BANKING  109 

sequently  ceased  to  circulate  in  any  consider- 
able quantities.  Between  1802  and  1810  the 
market  price  of  gold  was  20  per  cent  higher 
than  the  mint  price.  Shrewd  business  men 
would  not  take  bullion  with  which  they  could 
pay  one  hundred  and  twenty  dollars  of  their 
debts,  to  the  mint  and  have  it  coined  into  ten 
gold  coins  worth  ten  dollars  each  and  thereby 
lose  twenty  dollars  of  their  debt-paying  ca- 
pacity. 

The  high  price  of  gold  was  due  in  a  large 
measure  to  the  Napoleonic  wars  which  acted 
as  a  drain  on  the  gold  of  the  United  States  and 
England,  and  caused  the  Bank  of  England  to 
suspend  specie  payments  for  a  period  of  twen- 
ty-five years. 

An  attempt  was  made  to  correct  this  error 
in  the  mint  price  of  the  precious  metals  in  1834, 
when  the  mint  price  of  gold  was  raised  6i/^  per 
cent.  For  a  while  after  this  change  was  made 
gold  and  silver  circulated  fairly  well  and  the 
coinage  of  gold  quadrupled.  But  the  influx  of 
new  gold  due  to  the  discoveries  in  California 
and  Australia  caused  gold  to  fall  in  value  below 
the  mint  price,  and  silver  became  the  under- 
valued metal,  and  all  full  weight  silver  coins 
disappeared,  leaving  as  our  only  silver  coins 
with  which  to  transact  retail  trade,  foreign  and 


110  THE  EVOLUTION   OF   BANKING 

domestic  coins  so  worn  through  use  that  they 
had  lost  from  5  to  20  per  cent  of  their  value. 
In  1860  one  thousand  silver  dollars  of  full 
weight  were  worth  in  the  market  as  bullion 
$1,045.00  and  they  were  promptly  consigned  to 
the  melting  pot  and  exported.  In  1870  one 
thousand  silver  dollars  were  worth  $1,027 ;  in 
1872,  $1,022 ;  in  1873,  $1,003.  There  were  prac- 
tically no  silver  dollars  being  coined,  and  the 
few  that  were  coined  speedily  disappeared 
from  circulation.  During  this  period,  from 
1792  to  1873,  only  a  little  more  than  eight  mil- 
lions of  silver  dollars  were  coined,  or  an  aver- 
age of  $100,000  a  year  for  the  eighty-one  years 
that  the  mints  were  open  to  the  free  coinage 
of  silver.  This  amount  would  scarcely  have 
been  sufficient  for  the  needs  of  the  expanding 
commerce  had  they  all  remained  in  circulation. 
In  addition  to  this  error  of  trying  to  fix  a 
permanent  price  for  gold  and  silver,  business 
was  further  complicated  by  reason  of  the  for- 
eign coins  that  were  circulating  as  a  medium 
of  exchange.  The  volume  of  these  foreign 
coins  was  sufficiently  large  that  congress  was 
compelled  to  recognize  the  fact  and  fix  the 
values  at  which  they  should  be  received  at  the 
public  offices  of  the  United  States.  The  for- 
eign coins  recognized  as  current  in  the  United 


THE   EVOLUTION    OF   BANKING  111 

States,  and  made  legal  tender,  were  the  gold 
coins  of  Great  Britain,  France,  Portugal,  Spain 
and  her  dominions,  Brazil,  Mexico,  and  Colum- 
bia. The  silver  coins  recognized  vrere  the  five 
franc  piece,  the  silver  dollars  of  Mexico,  Peru, 
Chile,  Bolivia,  Brazil,  Central  America,  and  the 
Spanish  milled  dollar  or  piece  of  eight,  as  it 
was  also  called. 

The  condition  of  the  circulating  medium  of 
the  United  States  after  the  revolution  bears  a 
strong  resemblance  to  the  conditions  prevailing 
in  the  Republic  of  Venice  at  the  time  of  the 
establishment  of  the  Bank  of  Venice. 

It  would  be  strange  indeed  if  the  citizens  of 
this  nation  did  not  try  to  evolve  some  system 
of  banking  and  currency  which  would  relieve 
them  of  the  annoyances  and  losses  that  were 
inevitable  under  the  conditions  that  they  found 
themselves  in.  They  had  before  them  the  ex- 
ample of  the  Bank  of  England,  which  received 
deposits,  discounted  notes  for  merchants  and 
others,  and  issued  bank  notes,  which,  together 
with  the  deposits,  were  declared  to  be  redeema- 
ble in  gold  on  demand,  and  for  which  purpose 
coin  reserves  were  maintained  that  were 
deemed  sufficient  to  keep  the  bills  at  par  with 
gold  in  all  business  transactions. 

The  various  states  began  issuing  charters  for 


112  THE  EVOLUTION   OF  BANKING 

banks.  Some  of  these  charters  fell  into  the 
hands  of  men  who,  by  reason  of  their  character 
and  ability,  could  be  depended  on  to  make  care- 
ful use  of  their  trust.  Others  were  obtained  by 
men  that  were  easily  led  into  loaning  the  money 
of  the  bank  on  hazardous  and  speculative  en- 
terprises, and  again  others  were  secured  by 
unscrupulous  individuals  of  which  there  are 
always  a  number  in  any  community.  But  all 
of  these  banks,  whether  managed  by  the  wise, 
the  weak,  or  the  dangerous  men,  were  liable 
to  failure  some  time  or  other  by  reason  of  the 
fundamental  error  in  making  all  of  their  de- 
posits and  issues  of  currency  payable  in  coin  on 
demand,  a  promise  incapable  of  fulfillment. 
This  was  proven  by  the  fact  that  specie  pay- 
ment was  suspended  by  the  banks  of  the  United 
States  ten  times  between  1809  and  1860,  a 
period  of  fifty-one  years,  or  an  average  of  one 
panic  every  five  years.  Is  it  any  wonder  that 
this  period  has  been  designated  as  one  of  "wild- 
cat banking"? 

Some  of  the  banks,  particularly  those  located 
in  New  England  and  New  York,  were  fairly 
well  managed  and  successful,  but  a  large  num- 
ber in  the  western  and  southern  states  were 
managed  in  such  a  way  as  to  be  open  to  the 
severest  criticism. 


THE   EVOLUTION    OF   BANKING  113 

Some  of  the  states  of  the  Union  established 
banks  which  were  owned  wholly  or  in  part  by 
the  state  itself,  and  in  some  states  the  banks 
so  established  were  failures,  and  in  the  ease  of 
other  states  the  success  was  such  as  to  alto- 
gether set  at  rest  the  question  of  whether  or 
not  the  state  can  successfully  conduct  a  bank- 
ing business. 

The  most  notable  instance  of  the  success  of 
the  bank  owned  entirely  by  a  state  was  the 
Bank  of  the  State  of  South  Carolina,  estab- 
lished in  1812.  The  deplorable  condition  of 
commerce  in  South  Carolina,  caused  mainly  by 
the  war  with  England  and  the  suspension  of 
specie  payments,  together  with  the  high  price 
of  gold  and  the  consequent  disappearance  of 
coin,  left  the  citizens  without  adequate  means 
of  exchange  with  which  to  carry  on  their  com- 
mercial transactions,  and  the  state  decided  to 
organize  a  bank  as  a  measure  of  relief. 

The  capital  of  the  bank  consisted  of  all  the 
funds  and  securities  which  the  state  had  in  its 
possession  at  the  time,  and  also  debts  of  what- 
ever kind  that  were  due  to  the  state.  This 
gave  the  bank  a  capital  to  begin  with  of  a  little 
over  one  hundred  thousand  dollars.  During 
the  next  seven  or  eight  years  the  eaiptal  was 
increased  to  about  $1,200,000.     There  was  no 


114  THE   EVOLUTION   OF   BANKING 

part  of  the  capital  contributed  by  any  individ- 
ual, as  was  the  case  in  Indiana,  where  the  state 
owned  one-half  of  the  stock  and  individuals 
owned  the  other  half.  In  South  Carolina  the 
state  was  the  sole  owner  and  the  president  of 
the  bank  and  the  board  of  directors  were 
elected  annually  by  the  legislature. 

The  bank  transacted  a  regular  banking  busi- 
ness. It  received  deposits,  and  it  discounted 
notes  at  the  rate  of  6  per  cent  interest,  when 
endorsed  by  two  or  more  good  names.  It  also 
loaned  money  on  real  estate  security  at  7  per 
cent  interest,  the  loans  being  limited  to  not 
more  than  one-third  the  value  of  the  land,  and 
not  more  than  two  thousand  dollars  could  be 
loaned  to  one  person.  The  mortgages  were  for 
one  year  only,  but  could  be  renewed  from  year 
to  year  upon  payment  of  10  per  cent  of  the 
principal.  These  loans  were  apportioned 
equally  among  the  legislative  districts.  Circu- 
lating notes  were  issued  by  the  bank,  but  the 
amount  was  limited  to  twice  the  amount  of  the 
capital.  The  bank  had  the  exclusive  right  to 
issue  notes  for  five  dollars  or  less  and  some 
were  issued  for  the  small  amount  of  six  and 
one-quarter  cents.  Three  branches  were  main- 
tained, but  were  not  profitable;  but  the  state 
believed  that  the  convenience  of  the  public  was 


THE   EVOLUTION    OF   BANKING  115 

of  sufficient  consequence  to  offset  the  pecuniary 
loss  sustained.  Beside  the  capital  of  the  bank, 
the  depositors  and  note  holders  had  as  an  addi- 
tional security,  the  credit  of  the  entire  state, 
which  was  pledged  to  cover  all  possible  losses. 

The  bank  was  conducted  with  ability  and 
integrity.  "While  it  had  made  some  losses, 
and  in  addition  maintained  the  unprofitable 
branches,  its  statement  in  1843  showed  a  total 
profit  to  the  state  of  over  $3,672,000.00.  It  had 
also  repeatedly  made  advances  of  money  to  the 
state  (at  one  time  more  than  a  half  million  dol- 
lars)  without  interest. 

One  notable  instance  where  the  bank  was 
signal  service  to  the  people  was  after  the  great 
fire  of  1838,  which  destroyed  the  greater  part 
of  the  city  of  Charleston.  The  state  issued 
$2,000,000  of  bonds  to  relieve  the  sufferers. 
The  bank  sold  the  bonds  in  London  and  loaned 
the  money  on  land  in  the  burnt  district  and  the 
people  were  thus  enabled  to  rebuild  their  homes. 

In  his  message  to  the  legislature,  Nov.  24, 
1852,  Governor  Means,  in  discussing  the  man- 
agement of  the  bank,  says :  * '  This  institution 
has  proved  itself  to  be  highly  useful  and  safe 
as  a  fiscal  agent  of  the  state,  and  has  aided 
materially  in  sustaining  our  people  during  the 
severe  monetary  crisis  through  which  we  have 


116  THE   EVOLUTION    OF   BANKING 

passed.  As  all  human  institutions  are  imper- 
fect, no  doubt  some  instances  of  mismanage- 
ment have  occurred  in  the  conduct  of  its 
affairs.  I  believe  that  the  only  mismanagement 
that  has  been  complained  of,  is  an  over  in- 
dulgence of  some  of  its  debtors.  I  have  not 
been  able  to  learn,  however,  that  the  bank  has 
sustained  any  losses  from  this  cause. 

"In  some  instances  a  long  indulgence  has  se- 
cured the  final  payment  of  the  debt,  and  at  the 
same  time  enabled  the  debtor  to  secure  a  com- 
petence for  his  family  when  the  sudden  calling 
in  of  the  debt  would  have  resulted  in  heavy 
losses  to  the  bank  and  brought  ruin  and  bank- 
ruptcy upon  the  debtor I  know 

that  great  fears  are  entertained  as  to  the  polit- 
ical power  which  a  strong  bank  of  the  state 
could  wield.  But  these  are  rather  imaginary 
than  real,  if  you  will  reflect  that  it  will  be  en- 
tirely under  the  control  of  the  legislature.  Its 
officers  are  elected  annually  and,  of  course, 
could  be  removed  if  found  exerting  any  influ- 
ence at  variance  with  the  true  interests  of  the 
people.  All  the  arguments  which  go  to  estab- 
lish our  fears  that  a  corrupting  influence  might 
be  exercised  upon  the  politics  of  the  state  will 
apply  equally  to  private  banks. 

"If  there  is  any  real  danger  of  such  influ- 


THE   EVOLUTION    OF   BANKING  117 

cnccs  from  moneyed  monopolies,  it  is  far  better 
that  they  should  be  under  control  of  the  state 
than  that  they  should  control  the  state." 

The  Bank  of  the  State  of  South  Carolina  dur- 
ing the  sixty  years  of  existence  was  able  to 
maintain  itself  during  all  the  financial  panics 
that  swept  over  the  country.  Its  credit  was  so 
good  that,  while  private  banks  were  forced  to 
suspend,  its  notes  were  hoarded  the  same  as 
gold  by  the  frightened  people.  It  passed  un- 
scathed through  the  wreck  of  southern  institu- 
tions caused  by  the  war  of  the  rebellion. 

As  part  of  the  financial  legislation  during 
the  war  of  the  rebellion,  congress  levied  an 
annual  tax  of  10  per  cent  on  the  currency  is- 
sued by  the  banks  chartered  by  the  different 
states.  This  was  for  the  puri)ose  of  stimulating 
the  establishment  of  national  banks  and  there- 
by making  a  market  for  the  United  States 
bonds.  These  bonds  could  then  be  deposited 
with  the  United  States  treasurer,  who  was 
authorized  to  issue  national  bank  notes  to  the 
extent  of  90  per  cent  of  the  face  value  of  the 
bonds.  This  act  wiped  out  the  state  bank  notes 
completely.  The  Bank  of  the  State  of  South 
Carolina  went  into  voluntary  liquidation  in 
1870  and  paid  its  depositors  and  note  holders  in 
full.  No  one,  during  its  existence  of  sixty  years, 


118  THE   EVOLUTION    OF   BANKING 

lost  a  single  dollar  ou  account  of  the  bank. 
It  is  to  be  regretted  that  the  people  of  South 
Carolina  were  not  fortunate  enough  to  have  as 
governor  at  the  time  of  the  destruction  of 
Charleston  a  man  as  wise  financially  as  the  gov- 
ernor of  Guernsey,  If  they  had,  they  would 
never  have  committed  the  blunder  of  issuing 
two  millions  of  bonds  to  the  bankers  of  Lon- 
don, and  burdening  themselves  with  the  inter- 
est charge  for  twenty,  thirty,  or  perhaps  forty 
years  which  tho»2  bonds  necessitated.  Their 
own  bank,  properly  utilized,  could  have  sup- 
plied all  the  money  needed  to  reconstruct  their 
city.  The  money  could  have  been  issued  as 
buildings  were  erected,  just  as  was  done  in 
Guernsey.  The  redemption  of  the  money  would 
have  been  in  its  acceptance  by  the  state  in  pay- 
ment of  taxes,  and  by  the  bank  in  the  yearly 
payments  on  the  mortgages  given  as  security 
for  the  money  when  it  was  issued.  When  the 
last  mortgage  was  paid,  the  last  of  the  money 
would  have  been  redeemed.  It  was  a  piece  of 
financial  folly  for  the  state  to  borrow  the  gold 
in  London  and  import  it  for  the  purpose  of 
erecting  buildings.  The  idle  men  and  the  mate- 
rials were  on  hand,  and  the  state  should  have 
issued  the  money  necessary  to  bring  these 
latent  forces  into  activity. 


1 


THE   EVOLUTION    OF   BANKING  119 


STATE  BANK  OF  ILLINOIS 

The  Constitution  of  the  State  of  Illinois  per- 
mitted the  general  assembly  to  establish  and 
regulate  a  state  bank  and  its  branches  if  they 
desired.  Accordingly  the  legislature  on  March 
22,  1819,  incorporated  a  bank  and  provided  for 
ten  branches.  Its  capital  was  to  be  $4,000,000 — 
one-half  of  which  was  to  be  subscribed  by  the 
state  and  one-half  by  individuals.  Ten  branches 
could  be  established  and  were  to  begin  business 
as  soon  as  $15,000  was  paid  in.  Not  a  dollar  of 
stock  was  ever  subscribed  and  the  attempt  was 
a  failure. 

In  1821  the  charter  was  repealed  and  a  new 
bank  to  be  owned  and  operated  by  the  state  was 
incorporated  for  ten  years.  Its  charter  was  a  du- 
plicate in  its  essential  particulars  of  the  charter 
of  the  bank  of  the  state  of  South  Carolina,  which 
had  then  been  in  operation  about  ten  years. 

All  of  the  capital  stock,  which  was  to  be  $500,- 
000,  was  to  be  owned  by  the  state.  The  presi- 
dent and  directors  of  the  bank  were  to  be  elected 
biennially  by  the  senate  and  lower  house  in  joint 
session.  Its  principal  office  was  located  at  Van- 
dalia,  which  was  then  the  capital  of  the  state. 
The  state  was  divided  into  five  districts  and  a 


120  THE   EVOLUTION    OF   BANKING 

branch  bank  was  to  be  established  in  each  one. 
All  the  funds  of  the  state  and  all  money  re- 
ceived from  the  United  States  for  school  pur- 
poses, together  with  all  specie  and  land  office 
money  that  came  into  the  treasury,  were  to  be 
deposited  in  the  bank.  The  bank  was  author- 
ized to  issue  notes  to  double  the  amount  of  the 
money  so  deposited  and  to  redeem  them  upon 
demand  in  gold  or  silver.  Very  little  specie 
was  in  circulation  and  almost  none  came  into 
the  bank.  One  branch  bank  received  only  two 
dollars  in  specie  during  its  whole  existence  and 
these  were  retained  as  curiosities. 

Two  thousand  dollars  was  appropriated  to 
start  the  bank.  This  was  used  to  pay  the  cost 
of  printing  $300,000  in  notes  of  from  one  to 
twenty  dollars  each.  These  notes  were  to  bear 
two  per  cent  interest.  They  were  to  be  re- 
ceived by  the  bank,  the  state,  or  any  county 
at  par.  The  salaries  of  all  the  state  officers  were 
to  be  paid  in  them.  Any  creditor  was  obliged 
to  accept  them  at  par  for  any  debt  due. 

The  notes  were  to  be  distributed  to  the  branch 
banks  in  proportion  to  the  number  of  the  in- 
habitants in  the  district  and  were  to  be  loaned 
as  fast  as  applied  for.  Loans  for  one  hundred 
dollars  or  less  were  to  be  secured  by  notes  with 
one  endorser.     Loans  of  over  one  hundred  dol- 


THE   EVOLUTION    OF   BANKING  121 

lars  were  to  be  secured  by  mortgage  on  real 
estate.  No  loan  was  to  be  for  more  than  $1,000, 
at  six  per  cent  interest,  and  could  be  re- 
newed annually  upon  payment  of  ten  per  cent 
of  the  principal.  The  banks  were  to  transact 
no  business  but  loaning  notes  except  that  they 
could  exchange  their  notes  at  par  for  gold  and 
silver  and  land  office  paper.  One-tenth  of  the 
bank's  notes  were  to  be  retired  annually.  The 
faith  and  credit  of  the  state  of  Illinois,  together 
with  its  lands  and  its  revenue,  both  present  and 
future,  were  pledged  to  redeem  the  bank's  notes 
within  ten  years. 

There  is  a  sharp  contrast  between  the  man- 
agement and  history  of  the  State  Bank  of  Illi- 
nois and  that  of  the  Bank  of  the  State  of  South 
Carolina.  While  the  latter  was  managed  with 
prudence  and  with  a  strict  sense  of  commercial 
honor,  the  Illinois  bank  became  almost  at  once 
a  cesspool  of  political  corruption. 

Under  the  charter  the  officials  had  the  right 
to  borrow  $51,350,  or  more  than  one-sixth  of  the 
total  issue  of  the  bank's  notes,  and  promptly 
took  advantage  of  their  privilege,  and  every  per- 
son who  could  get  a  friend  or  relative  to  en- 
dorse his  note  borrowed  his  hundred  dollars  just 
as  promptly.  The  directors  found  a  sure  road  to 
popularity  in  loaning  to  anybody  who  desired 


122  THE   EVOLUTION    OF   BANKING 

it,  and  as  they  either  were  or  expected  to  be  can- 
didates for  office,  little  care  was  exercised  as  to 
security  or  certainty  of  pajTnent. 

The  directors  of  the  bank  and  its  branches 
being  themselves  heavy  borrowers  from  the  bank 
were  at  no  pains  to  maintain  the  credit  of  its 
notes.  The  governor  of  the  state  in  his  message 
of  1826  said  they  used  their  "right  to  borrow 
to  the  full  extent  of  the  law  and  thus  became 
more  interested  than  any  other  class  in  the  com- 
munity in  impairing  the  credit  of  the  institution 
and  depreciating  its  notes  as  the  means  of  facili- 
tating the  discharge  of  the  debts  they  had  con- 
tracted with  it,  and  hence  those  gentlemen  have 
been  generally,  if  not  universally,  found  among 
the  warmest  advocates  for  depreciating  those 
notes,  scaling  the  bank  debts  and  various  other 
expedients  whose  inevitable  effects  would  be  the 
revolting  injustice  of  requiring  the  balance  of 
the  community  to  be  taxed  for  the  payment  of 
their  debts. ' ' 

There  being  little  or  no  silver  coin  in  the  state 
the  people  adopted  the  expedient  of  cutting  the 
bills  into  small  pieces  for  use  in  transactions  in- 
volving fractions  of  a  dollar. 

The  promised  redemption  of  the  bank  bills 
in  specie  on  demand  was  a  physical  impossi- 
bility and  by  1823  they  were  worth  only  fifty 


THE   EVOLUTION    OF   BANKING  123 

cents  on  the  dollar.  The  state  was  obliged  to 
double  the  salaries  of  the  officials  and  the  mem- 
bers of  the  legislature.  Later  the  value  of  the 
notes  were  fixed  at  three  to  one  of  specie  and  as 
the  state  was  obliged  to  accept  the  notes  at  par 
for  all  its  taxes,  etc.,  the  result  was  a  deficit  in 
the  public  treasury. 

The  state  auditor  was  obliged  to  issue  audit- 
ors' warrants  for  state  expenses  payable  at  some 
uncertain  date  in  the  future  and  these,  together 
with  the  bank  notes,  fell  as  low  as  twenty-five 
cents  on  the  dollar. 

In  the  meantime,  although  these  depreciated 
bank  notes  could  be  used  at  par  in  the  payment 
of  debts  due  to  the  bank,  Ford's  History  of  Illi- 
nois tells  us  that  "few  persons  pretended  to  pay 
their  debts  to  the  bank.  More  than  half  of 
those  who  had  borrowed  considered  what  they 
had  gotten  from  it  was  so  much  clear  gain,  and 
never  intended  to  pay  it  from  the  first. ' '  From 
the  beginning  the  management  showed  either  ig- 
norance or  vieiousness  resulting  in  violations  of 
the  charter  provisions  and  defalcations.  Ex- 
penses exceeded  the  income,  loans  were  made 
without  sccurit}'  and  the  papers  and  accounts 
were  in  confusion. 

The  legislature  finally  enacted  a  law  which 
among  other  things  made  it  the  duty  of  the 


124  THE   EVOLUTION    OF   BANKING 

cashier  to  burn  all  notes  on  hand  not  needed  for 
expenses  in  the  public  square  in  the  presence 
of  the  governor  and  other  officers.  Auditors' 
warrants  were  receivable  for  bank  debts.  The 
bank  was  no  longer  to  receive  deposits  of  indi- 
viduals and  any  on  hand  were  to  be  returned 
to  depositors.  The  offices  of  president  and  di- 
rectors of  branch  banks  were  abolished  and  cash- 
iers appointed  by  the  governor  were  to  manage 
the  branches.  All  manner  of  expedients  were 
tried  and  inducements  offered  to  facilitate  the 
collection  of  the  debts  due  the  banks,  with  very 
little  success. 

In  1829  it  was  enacted  that  all  public  officers 
in  debt  to  the  bank  should  not  receive  their  sala- 
ries until  their  debts  were  paid.  Debtors  to  the 
bank  were  given  three  years  extension — one- 
third  of  the  debt  to  be  paid  each  year,  which,  if 
paid  promptly,  was  to  be  without  interest  and  a 
ten  per  cent  discount  on  the  amount  of  the  prin- 
cipal. This  latter  discount  was  afterwards  in- 
creased to  twenty-five  per  cent.  This  liberality 
may  perhaps  be  explained  by  the  fact  that  the 
members  of  the  legislature  were  themselves  the 
largest  debtors. 

In  1831  it  was  decided  to  close  the  bank.  A 
loan  was  authorized  to  be  applied  to  the  pay- 
ment of  expenses  and  the  redemption  of  the  bank 


THE  EVOLUTION    OF   BANKING  125 

notes.  All  bank  notes  on  hand  were  to  be  burned 
and  all  received  afterwards  were  to  be  burned 
at  the  end  of  each  quarter. 

All  debts  due  the  bank  were  turned  over  to 
the  attorney  general  for  collection  and  he  was 
instructed  to  sell  all  the  bank  property. 

The  financial  loss  to  the  state  of  Illinois 
through  the  mismanagement  of  the  bank  was  in 
round  figures  probably  $500,000 — a  huge  sum 
for  a  sparsely  settled  frontier  state.  What  the 
loss  was  to  individuals  is  something  that  is  in- 
calculable. 

From  1831  to  1835  there  were  no  banks  in 
Illinois,  but  in  the  latter  year  the  legislature 
decided  to  re-establish  a  state  bank.  The  bill 
passed  the  lower  house  by  a  majority  of  one  vote. 
The  same  was  true  of  the  senate. 

The  charter  was  for  twenty-five  years  and  the 
capital  was  to  be  $1,500,000,  of  which  the  state 
reserved  the  right  to  subscribe  $100,000-. 

It  was  to  have  six  branches  and  could  issue 
its  notes  to  the  amount  of  two  and  one-half  times 
its  paid  in  capital.  It  was  to  redeem  in  specie 
any  of  its  notes  on  demand — a  failure  to  do  so 
for  a  period  of  ten  days  would  result  in  the  re- 
peal of  its  charter. 

It  was  also  empowered  to  borrow  up  to  $1,- 


126  THE   EVOLUTION   OF   BANKING 

000,000  and  to  reloan  it  on  real  estate  security 
at  not  to  exceed  ten  per  cent  interest. 

The  stock  of  the  bank  was  quickly  subscribed 
and  the  bank  started  business.  One  of  its  first 
acts  was  to  loan  $800,000  to  a  firm  of  speculators 
who  were  trying  to  get  control  of  the  lead  in- 
dustry of  Galena.  Land  booms  began  to  appear 
and  every  one  who  had  a  little  money  or  who 
could  borrow  some  engaged  in  land  and  town 
lot  speculation. 

The  mania  for  speculation  was  rampant  in  Illi- 
nois as  well  as  the  other  northern  and  western 
states.  The  legislature  was  swept  off  its  feet 
and  voted  a  loan  of  $8,000,000  to  be  spent  for  in- 
ternal improvements,  such  as  canals,  railroads 
and  river  improvements.  It  also  authorized  a 
$2,000,000  increase  of  the  capital  stock  of  the 
bank  to  be  subscribed  wholly  by  the  state. 

A  bank  at  Shawneetown  was  also  allowed  to 
increase  its  capital  stock  $1,400,000,  of  which  the 
state  agreed  to  take  $1,000,000. 

Two  years  after  the  bank  was  established 
the  panic  of  1837  swept  over  the  country  and 
the  bank,  together  with  practically  every  other 
bank  in  the  United  States,  suspended  specie 
payments.  The  charter  should  have  been  for- 
feited, but  the  finances  of  the  state  and  the  bank 


THE   EVOLUTION    OF   BANKING  127 

were  so  interwoven  that  to  liquidate  the  bank 
assets  would  entail  a  heavj'^  loss  on  the  state. 

The  economic  conditions  in  Illinois  were  dupli- 
cated in  all  of  the  border  states  and  many  of 
the  eastern  ones  also.  A  graphic  description  of 
conditions  in  Michigan  during  this  period  is 
given  by  Judge  Cooley  in  another  chapter. 

The  financial  condition  of  Illinois  was  so  bad 
by  the  year  1842  that  the  officers  of  the  state, 
the  judges  and  the  members  of  the  legislature 
were  in  dire  need.  No  salaries  had  been  paid 
and  there  was  no  money  in  the  treasury  to  even 
paj'"  the  postage  on  public  documents.  The  in- 
terest on  the  state  bonds  of  nearly  $14,000,000 
exceeded  the  total  revenue  of  the  state  and  no 
attempt  was  made  to  pay  it.  The  bonds  were 
quoted  as  low  as  14  cents  on  the  dollar. 

In  February,  1842,  seven  years  after  it  started, 
the  State  Bank  of  Illinois  failed.  It  had  $3,- 
000,000  of  its  bills  in  circulation.  This  spread 
ruin  and  disaster  all  over  the  state.  There  was 
practically  no  specie  in  circulation  and  people 
were  obliged  to  resort  to  barter  to  obtain  the 
necessaries  of  life. 

February  25,  1843,  an  act  was  passed  to  put 
the  bank  in  liquidation  and  this  ended  the  his- 
tory of  banks  which  the  state  owned  wholly  or 
in  part. 


128  THE   EVOLUTION    OF   BANKING 

The  salient  points  in  the  foregoing  are : 
First:     The  credit  of  the  state  was  used  by 
individuals  for  purposes  of  speculation  and  ex- 
ploitation.    Public  credit  should  be  used  only 
for  public  purposes. 

Second:  The  utter  folly  of  promising  to  re- 
deem the  currency  necessary  to  carry  on  legit- 
imate modern  commerce,  in  specie  on  demand. 
The  meagre  quantity  of  gold  in  existence  in  com- 
parison to  the  immense  and  growing  volume  of 
trade  makes  it  absolutely  certain  that  the  prom- 
ise will  be  broken  when  the  demand  is  made  that 
it  be  fulfilled. 


THE   EVOLUTION   OF    BANKING  129 

STATE  BANK  ISSUES  IN  MICHIGAN 

BY  JUDGE  THOMAS   M.  COOLEY. 

The  tide  of  immigration  into  Michigan  was  at 
this  time  at  its  highest,  and  the  highways,  espe- 
cially from  New  York,  around  Lake  Erie,  into 
the  territory,  were  crowded  with  vehicles  loaded 
with  immigrants.  The  tide  of  speculation 
throughout  the  country  was  also  swelling  to 
enormous  proportions,  and  was  probably  greater 
nowhere  else  than  in  the  state  of  Michigan,  if 
indeed  in  any  other  sections  it  reached  a  like 
magnitude.  The  speculation  was  particularly 
wild  in  the  case  of  lands.  The  land  bought  from 
the  government  one  day  for  $1.25  per  acre  was 
held  at  twice  or  three  times  that  sum  the  next, 
and  in  many  cases  actually  sold  at  prices  greatly 
exceeding  this  increased  valuation. 

Villages  on  paper  were  being  laid  out  in  every 
part  of  the  state ;  some  in  the  belief  on  the  part 
of  proprietors  that  they  were  soon  to  become 
large  and  important  towns,  but  many  of  them 
also  with  a  view  simply  to  take  advantage  of  the 
prevailing  delusion  here  and  elsewhere  to  sell 
lands  just  bought  at  the  government  price  for 
ten,  twenty,  fiftj^  or  a  hundred  times  what  it  had 
cost.  There  seemed  to  be  no  possible  limit  to 
public  credulity  on  the  subject,  and  men  were 


130  THE   EVOLUTION    OF   BANKING 

apparently  becoming  rich  on  an  expenditure  of  a 
few  hundred  dollars  in  buying  wild  lands. 

Under  such  circumstances  the  greatest  need 
of  the  day  seemed  to  be  banks,  and  the  fifteen 
then  existing  in  the  territory,  with  a  capital 
stock  aggregating  about  two  millions — there  be- 
ing one  in  almost  every  town  of  importance — 
appeared  to  be  totally  inadquate  to  supply  the 
public  demand  for  banking  facilities.  More 
money  was  required  to  enable  the  people  to  carry 
on  the  enormous  transactions  that  from  day  to 
day  they  engaged  in,  the  most  of  them  purely 
speculative;  but  nevertheless,  at  the  time,  seem- 
ing to  a  large  proportion  of  those  who  were  par- 
ties to  them,  to  be  not  only  substantial  but  alto- 
gether reasonable,  since  the  inflow  of  immigra- 
tion and  the  extensive  system  of  railroads  and 
canals  planned  for  the  state,  and  then  well  under 
way,  were  expected  speedily  to  make  of  Michi- 
gan a  populous  as  well  as  a  prosperous  common- 
wealth. 

Under  these  circumstances,  the  legislature  of 
1837  pased  a  general  act  entitled  "An  act  to 
organize  and  regulate  banking  associations." 
The  act  provided  that  whenever  any  persons  resi- 
dent in  any  of  the  counties  of  the  state  should 
be  desirous  of  forming  an  association  for  trans- 
acting banking  business,   they  should  make  a 


THE  EVOLUTION   OF   BANKING  131 

written  application  to  the  treasurer  and  clerk 
of  the  county,  setting  forth  the  amount  of  capital 
proposed  and  the  place  of  location;  and  on  the 
application  by  at  least  twelve  freeholders  of  the 
county,  it  was  made  the  duty  of  the  treasurer 
and  clerk  to  cause  public  notice  to  be  given  for 
thirty  days,  upon  the  expiration  of  which  time 
the  organization  of  the  bank  might  proceed,  books 
being  opened  for  the  subscription  of  the  capital 
stock,  which  was  not  to  be  less  than  fifty  thou- 
sand nor  more  than  three  hundred  thousand  dol- 
lars. The  bank  was  not  to  commence  operations 
until  the  whole  amount  of  the  capital  stock  was 
subscribed,  nor  until  30  per  centum  of  the 
amount  was  paid  in  legal  money.  Ten  per  cent 
was  to  be  paid  on  making  subscription,  the 
county  treasurer  to  receive  the  same,  but  to  pay 
it  over  to  the  cashier  when  the  bank  should  be 
organized.     *     *     * 

The  issue  of  notes  or  bills  for  circulation  as 
money  was  limited  to  twice  and  a  half  of  the 
amount  of  the  capital  stock  then  paid  in  and 
actually  possessed,  and  the  loans  and  discounts 
were  also  limited  to  the  same  amount.  *  *  • 
The  bills  were  to  be  paid  on  demand,  and  if  not 
paid  within  thirty  days  after  demand  at  the 
banking  house,  the  corporation  was  to  be  dis- 
solved.    *     *     * 


132  THE   EVOLUTION   OP   BANKING 

Immediate  proceedings  were  taken  in  every 
section  of  the  state  to  organize  banks  under  the 
authority  granted  by  this  act.  Many  of  these 
were  undoubtedly  organized  by  men  of  sufficient 
means,  who  proposed  to  conduct  a  just,  honor- 
able and  legitimate  banking  business  in  places 
needing  then,  or  in  immediate  prospect,  the 
facilities  their  bank  would  afford.  Nor  could  it 
be  said  that  in  all  other  cases  wrong  to  the  public 
was  in  contemplation.  The  organizers  saw  in 
the  prevailing  delusion  by  which  in  many  cases 
they  were  as  much  carried  away  as  the  public 
in  general,  an  opportunity  to  make  short  the 
road  to  wealth  by  availing  themselves  of  the 
privilege  to  issue  currency,  and  they  complied 
with  the  forms  required  by  law  so  far  as  they 
found  indispensable,  but  expecting  even  when 
they  evaded  compliance  that  the  bills  they  put 
out  would  be  redeemed  in  due  course  of  busi- 
ness from  the  gains  they  were  sure  to  make. 

The  capital  they  pretended  to  have  at  first 
they  would  have  in  fact  shortly,  and  then  they 
could  honestly  meet  all  obligations.  But  prob- 
ably no  banks  ever  organized  in  such  numbers 
were  based  on  such  utterly  worthless  securities 
as  were  these.  The  lands  mortgaged  as  security, 
even  when  they  were  lands  which  were  held  for 
prospective  farming  purposes,  were  valued,  ac- 


THE   EVOLUTION    OF   BANKING  133 

cording  to  the  ideas  then  prevailing,  at  ten, 
twenty,  or  even  fifty  times  the  value  they  proved 
to  possess  when  the  great  collapse  came.  And 
it  is  safe  to  say  that  in  very  many  cases  the 
lands  even  to  this  day  have  never  reached  a 
moiety  of  the  value  at  which  securities  were  then 
accepted  upon  them  by  the  county  officers. 

Some  of  the  banks  were  located  at  points  of 
little  or  no  business  importance ;  places  not  hav- 
ing the  slightest  need  of  a  bank,  and  whose  very 
names  suggest  that  they  may  have  been  selected 
as  localities  because  it  was  easier  to  give  the  se- 
curities on  nominal  village  property  at  such 
places  than  it  was  upon  lands  known  to  have  a 
substantial  value. 

No  less  than  forty-nine  banks  were  organ- 
ized under  this  act  before  the  third  day  of  April, 
1838,  when  the  legislature  intervened  by  an  act 
which  suspended  the  provisions  of  the  law  as  to 
the  creation  of  any  new  associations,  except  to 
allow  one  to  be  formed  in  the  county  of  Chip- 
pewa. The  aggregate  capital  of  these  forty-nine 
banks,  as  given  in  the  articles  of  association,  was 
about  four  million  dollars.  The  amount  actually 
paid  in  was  in  a  great  many  cases  merely  nom- 
inal. The  provision  for  the  immediate  payment 
of  10  per  cent  of  the  capital  stock  was  evaded 
in  various  ways;  sometimes  by  the  payment  of 


134  THE   EVOLUTION    OF   BANKING 

a  small  sum  which  was  immediately  drawn  out 
and  paid  back  again,  and  so  on  over  and  over 
until  the  required  amount  was  thus  made  up; 
sometimes  by  the  issue  of  a  certificate  reciting  a 
payment  of  specie  never  in  fact  paid ;  sometimes 
by  accommodations  between  the  organizers 
of  banks,  whereby,  after  the  required  pay- 
ment had  been  made  to  one,  the  sum  paid  in 
w^as  sent  to  the  location  of  another  bank  and 
used  for  making  payment  there,  and  so  on  in- 
definitely among  those  in  the  same  section  of  the 
state. 

The  general  fact  was  that  as  to  the  required 
securities  and  as  to  the  payment  of  money  upon 
the  capital  stock,  the  provisions  of  law  were  ren- 
dered perfectly  nugatory,  first  by  the  securities 
being  of  merely  nominal  value  as  compared  with 
the  amount  of  capital  stock,  and  next  by  ficti- 
tious payments  of  money  by  the  stockholders; 
and  when  the  banks  were  fully  organized,  they 
were  often  literally  shams,  representing  no  real 
capital  whatever,  but  nevertheless  flooding  the 
state  with  bills  for  the  benefit  of  those  who  had 
become  stockholders  for  the  purpose  of  the  crazy 
speculations  which  were  then  pervading  the 
state. 

Hon.  Alpheus  Felch,  who  was  bank  commis- 
sioner at  this  period,  has  given  in  his  official  re- 


THE   EVOLUTION    OF   BANKING  135 

ports,  and  in  other  publications,  a  graphic  ac- 
count of  the  conditions  of  things  as  he  found 
them  on  attempting  to  examine  into  the  affairs 
of  these  banks;  how  their  managers  undertook 
to  deceive  and  mislead  the  public  and  the  state 
authorities  as  to  their  real  condition,  and  how 
actively  they  bestirred  themselves  in  forward- 
ing money  from  place  to  place  in  order  that  they 
might  in  succession  be  able  to  make  a  showing 
of  capital  which  did  not  in  fact  exist.  The  gen- 
eral fact  was  that  the  banks  had  no  real  sub- 
stance, and  the  moment  the  great  revulsion  came 
in  business  affairs  through  the  country — a  re- 
vulsion more  extreme  in  Michigan  than  almost 
anywhere  else — they  necessarily  suspended  such 
specie  payments  as  they  had  attempted  to  make 
theretofore,  and  the  whole  system  suffered  an 
utter  collapse. 

At  the  January  term  of  the  Supreme  Court  in 
1844,  on  a  suit  brought  upon  a  draft  drawn  by 
a  cashier  of  one  of  these  institutions,  it  was  de- 
cided that  the  act  for  their  organization  was  un- 
constitutional. The  decision,  of  course,  rendered 
worthless  all  the  obligations  thad  had  previously 
been  taken,  and  discharged  the  officers  from  per- 
sonal responsibility.  The  banks,  which  had  come 
to  be  known  as  ' '  wild  cats, ' '  were  utterly  swept 
out  of  existence.     Those  which  had  attempted 


136  THE  EVOLUTION   OF  BANKING 

to  meet  their  obligations  had  been  in  a  state  of 
suspension  for  a  considerable  time  with  legisla- 
tive permission,  but  further  effort  at  recupera- 
tion was  now  abandoned. 

As  soon  as  it  became  apparent  that  the  banks 
organized  under  the  general  banking  law  were 
wanting  in  substantial  basis,  the  holders  of  the 
bills  made  haste  to  get  rid  of  them  for  anything 
of  value  they  could  obtain  therefore,  and  the 
discount  of  5  or  10  per  cent  that  they  were 
compelled  to  submit  to,  soon  increased  to  twenty 
or  thirty  or  fifty,  until  it  became  impossible  to 
dispose  of  them  at  all.  The  population  of  Michi- 
gan at  this  time  was  about  two  hundred  thou- 
sand, and  the  losses  suffered  from  the  worth- 
less currency  were  enormous.  A  number 
of  the  chartered  banks  had  been  as  badly 
managed  as  the  "wild  eats,"  and  went 
down  with  them,  while  those  that  succeeded  in 
preserving  their  credit  were  obliged  for  a  time 
to  avail  themselves  of  legislative  permission  to 
suspend  specie  payments.  Good  currency,  suffi- 
cient to  met  the  demands  of  business,  it  was 
almost  impossible  to  obtain.  Specie  had  alto- 
gether disappeared  from  circulation.  The  Safe- 
ty-Fund Banks  of  New  York,  and  the  State  Bank 
of  Indiana,  had  the  general  confidence  of  the 
people,  and  their  bills  were  met  with  oftener 


THE  EVOLUTION  OF   BANKING  137 

than  any  others,  but  banks  located  in  other 
states  and  of  doubtful  standing  not  infrequently 
succeeded  in  keeping  large  amounts  of  their  bills 
afloat  through  arrangement  with  Michigan  deal- 
ers, whereby  the  latter,  in  consideration  of  ex- 
ceptionally favorable  loans,  made  public  an- 
nouncement that  they  would  receive  the  bills 
of  the  former  in  payment  for  whatever  they 
sold,  and  upon  debts. 

Advertisements  to  this  effect  were  often  met 
with  in  the  newspapers.  Such  announcements, 
however,  in  many  cases,  indicated  only  that  the 
dealer  had  more  confidence  in  a  particular  cur- 
rency than  was  felt  generally,  and  expected  by 
bidding  for  it  to  increase  the  amount  of  his 
trade,  and  the  prices  he  could  charge  for  what 
he  sold.  But  the  fact  sometimes  doubtless  was 
that  he  thought  he  could  speedily  exchange  for 
something  of  value  the  bills  in  which  he  had  no 
confidence,  and  which  he  would  not  keep  over 
night  if  the  exchange  could  be  sooner  made. 

The  issues  of  Michigan  banks  as  compared  with 
the  population  and  business  of  the  state  were 
then  very  limited,  scarcely  exceeding  in  the  ag- 
gregate one  dollar  to  an  inhabitant.  In  1841 
the  state,  in  anticipation  of  a  state  loan,  author- 
ized an  issue  of  treasury  notes  in  the  simili- 
tude of  bank  bills,  and  receivable  for  taxes,  but 


138  THE   EVOLUTION   OF   BANKING 

these  were  soon  retired.  Naturally  a  general 
practice  of  barter  and  exchange  in  the  common 
transactions  between  man  and  man  sprung  up, 
and  this  went  quite  beyond  what  we  are  accus- 
tomed to  see  at  the  present  day  in  new  settle- 
ments, even  in  the  most  remote  and  inaccessible 
parts  of  the  country.  Every  country  store  was 
a  place  of  exchange,  where  the  merchant  dis- 
posed of  his  goods  for  wheat  and  other  grains, 
wool,  hides,  peltry,  butter  and  nearly  everything 
that  the  farmer  had  to  dispose  of.  The  miller 
took  his  toll  in  kind  for  grinding  grain;  the 
blacksmith  accepted  pay  in  potatoes  or  produce, 
and  so  on;  and  the  farmers  exchanged  work 
when  additional  labor  was  required  in  the  cul- 
tivation of  their  lands,  the  harvesting  of  their 
crops  or  the  erection  of  buildings.  Business  men 
of  good  standing  in  many  cases  issued  small 
notes  known  as  "  shinplasters, "  which  had  con- 
siderable circulation,  and  from  which  the  losses 
by  bankruptcy  were,  in  the  aggregate,  quite 
heavy. 


THE   EVOLUTION   OF   BANKING  139 

DEMONETIZATION  OF  THE  SILVER 
DOLLAR  IN  1873 

On  December  16,  1872,  a  bill  relating  to  mints, 
assay  offices  and  coinage  was  reported  to  the 
House  from  the  Senate  by  Sherman.  It  had  been 
prepared  two  years  before  by  the  agent  of  the 
foreign  bankers,  the  New  York  Chamber  of  Com- 
merce, and  John  J.  Knox — who  was  the  Comp- 
troller of  the  Currency.  It  provided  for  a  thor- 
ough change  in  our  silver  coinage ;  on  the  plea 
of  equalizing  it  with  that  of  France.  Sherman 
said  the  bill  had  passed  the  Senate  at  the  last 
session,  and  he  proposed  to  modify  only  a  single 
section.  He  wished  the  Senate  to  pass  it  without 
reading.  Senator  Casserly  of  California  opposed 
the  bill.  It  was  ordered  printed  and  read. 
When  it  was  put  upon  its  passage  in  the  Senate, 
January  17,  1873,  Sherman  added  seventeen 
amendments  instead  of  one.  The  house  disa- 
greed with  his  amendments;  he  then  moved  a 
conference  committee  of  which  he  was  the  head, 
and,  while  the  bill  was  being  considered  by  the 
committee,  he  introduced  the  following  amend- 
ment which  was  passed :  ' '  That  any  owner  of  sil- 
ver bullion  may  deposit  the  same  at  any  mint,  to 
be  formed  into  bars  or  into  dollars  of  420  grains 
Troy,  designated  as  trade  dollars,  and  no  deposit 


140  THE   EVOLUTION   OF   BANKING 

of  silver  for  other  coinage  shall  he  received." 

These  few  words  abolished  the  coinage  of  the 
old  41214  grain  silver  dollar  by  merely  omitting 
that  coin  from  the  enumeration  the  coins  of  the 
United  States.  It  was  entitled  "an  act  revis- 
ing and  amending  the  laws  relative  to  the  mints, 
assay  offices  and  coinage  of  the  United  States" 
and  bore  on  its  face  no  suggestion  of  any  change 
more  serious  than  that  of  regulating  the  petty 
details  of  mint  management. 

While  the  bill  was  under  consideration  in  the 
House,  except  a  mere  allusion  by  Mr.  Hooper 
and  Mr.  Potter,  there  is  not  a  single  word  in 
the  discussion  that  took  place,  then  or  after- 
ward, in  the  House  or  in  the  Senate,  indicating 
that  anybody  understood  that  a  change  was  to 
be  made  in  the  standard  of  value  in  the  United 
States.  The  discussion  that  took  place  pertained 
to  other  matters,  such  as  minor  coins,  and 
whether  the  eagle  should  be  retained  on  frac- 
tional silver  pieces  or  not,  etc. 

This  law  created  the  TRADE  DOLLAR,  but 
limited  its  legal  tender  power  to  any  sum  not 
exceeding  five  dollars  in  any  one  pajinent. 
Even  this  slight  legal  tender  power  was  abol- 
ished by  an  act  July  13,  1876,  which  provided 
"that  the  dollar  shall  not  hereafter  be  legal 
tender."     As  to  whether  the  Congressmen  and 


THE   EVOLUTION    OF   BANKESTG  141 

Senators  who  voted  to  pass  the  bill  were  ignor- 
ant as  to  the  effect  its  passage  w^ould  have  on 
the  coinage  or  not,  the  following  quotations 
ought  to  set  the  matter  at  rest.  Extract  from 
speech  by  Hon.  W.  D.  Kelly,  Chairman  of  the 
Committee  on  Coinage,  made  in  the  House  of 
Congress,  March  9,  1878.  "In  connection  with 
the  charge  that  I  advocated  the  bill  which  de- 
monetized the  standard  silver  dollar,  I  say  that, 
though  Chairman  of  the  Committee  on  Coin- 
age, I  was  as  ignorant  of  the  fact  that  it  would 
demonetize  the  silver  dollar,  or  of  its  dropping 
the  silver  from  our  system  of  coins,  as  were 
those  distinguished  senators,  Messrs.  Blaine  and 
Voorhies,  who  were  then  members  of  the  House, 
and  each  of  whom,  a  few  days  since,  interrogated 
the  other:  'Did  you  know  it  w^as  dropped  when 
the  bill  was  passed?'  'No,'  said  Mr.  Blaine ; 
'did  you?'  'No,'  said  Mr.  Voorhies.  'I  do  not 
think  that  there  were  three  members  of  the 
House  that  knew  it.  I  doubt  whether  Mr. 
Hooper,  who  in  my  absence  from  the  Commit- 
tee on  Coinage,  and  attendance  on  the  Commit- 
tee of  Ways  and  Means,  managed  the  bill,  knew 
it.  I  say  this  in  justice  to  him."  (Congressional 
Record,  volume  7,  part  2,  Forty-fifth  Congress, 
second  session,  page  1605.) 

Extract  from  speech  delivered  in  the  House 


142  THE  EVOLUTION    OF   BANKING 

of  Representatives  by  Mr.  Holman,  July  13, 1876 : 
''I  have  before  me  the  record  of  the  proceed- 
ings of  the  House  on  the  passage  of  that  meas- 
ure, a  record  which  no  man  can  read  without 
being  convinced  that  the  measure  and  the  method 
of  its  passage  through  this  House  was  a  'Co- 
lossal Swindle. '  I  assert  that  the  measure  never 
had  the  sanction  of  this  House  and  did  not  pos- 
sess the  moral  force  of  law."  (Congressional 
Record,  volume  4,  part  6,  Forty-fourth  Congress, 
First  Session,  appendix,  page  193.)  Again  on 
August  5,  1876,  he  said :  ' '  The  original  bill  was 
simply  a  bill  to  organize  a  bureau  of  mines  and 
coinage.  The  bill  which  finally  passed  the  House 
and  ultimately  became  a  law  was  certainly  not 
read  in  this  House.  It  was  never  considered 
before  this  House  as  it  was  passed.  Up  to  the 
time  the  bill  came  before  this  House  for  final 
pasage,  the  measure  had  simply  been  one  to  es- 
tablish a  bureau  of  mines.  It  came  from  the 
Committee  on  Coinage,  Weights  and  Measures. 
The  substitute  which  finally  became  a  law  was 
never  read,  and  is  subject  to  the  charge  made 
against  it  by  the  gentleman  from  Missouri  (Mr. 
Bland)  that  it  was  passed  by  the  House  without 
a  knowledge  of  its  provisions,  especially  upon 
that  of  coinage.  I  myself  asked  the  question 
of  ]Mr.  Hooper  whether  it  changed  the  law  in 


THE   EVOLUTION   OF   BANKING  143 

regard  to  coinage,  and  the  answer  of  Mr.  Hooper 
left  the  impression  on  the  whole  House  that  the 
subject  of  the  coinage  was  not  affected  by  the 
bill."  (Congressional  Record,  volume  4,  part  6, 
Forty-fourth  Congress,  first  session,  page  5237.) 
Senator  Conkling,  in  the  Senate,  March  30,  1876, 
during  the  remarks  of  Senator  Bogy  on  the  bill 
(S.  264)  to  amend  the  laws  relating  to  the  legal 
tender  of  silver  coin,  in  surprise,  inquired : '  *  Will 
the  Senator  allow  me  to  ask  him  or  some  other 
Senator  a  question?  Is  it  true  that  there  is  now 
by  law  no  American  dollar?  And,  if  so,  is  it 
true  that  the  effect  of  this  bill  is  to  make  half 
dollars  and  quarter  dollars  the  only  silver  coin 
which  can  be  used  as  a  legal  tender?" 

Mr.  Bright,  of  Tennessee,  said  of  the  law: 
"It  passed  by  fraud  in  the  house,  never  having 
been  printed  in  advance,  being  a  substitute  for 
the  printed  bill,  never  having  been  read  at  the 
clerk's  desk,  the  reading  having  been  dispensed 
with  by  an  impression  that  the  bill  made  no 
material  alteration  in  the  coinage  laws,  it  was 
passed  without  discussion,  debate  having  been 
cut  off  by  operation  of  the  previous  question. 
It  was  passed,  to  my  certain  information,  under 
such  circumstances  that  the  fraud  escaped  the 
attention  of  some  of  the  most  watchful  as  well 
as  the  ablest  statesmen  in  Congress  at  the  time. ' ' 


144  THE   EVOLUTION   OP   BANKING 

(Congressional  Record,  volume  7,  part  1,  second 
session,  Forty-fifth  Congress,  page  584.) 

General  Garfield,  in  a  speech  made  at  Spring- 
field, Ohio,  during  the  fall  of  1877,  said:  ''Per- 
haps I  ought  to  be  ashamed  to  say  so,  but  it  is 
the  truth  to  say  that  at  that  time  being  Chair- 
man of  the  Committee  on  Appropriation,  and 
having  my  hands  over  full  during  all  that  time 
with  work,  I  never  read  the  bill.  I  took  it  upon 
the  faith  of  a  prominent  Democrat  and  a  prom- 
inent Republican,  and  I  do  not  know  that  I  voted 
at  all.  There  was  no  demand  for  the  yeas  and 
nays,  and  no  one  opposed  the  biU  that  I  know 
of.  It  was  put  through  as  dozens  of  bills  are, 
as  my  friends  and  I  know,  in  Congress  on  the 
faith  of  the  report  of  the  chairman  of  commit- 
tee." 

Senator  Allison  said  on  February  15,  1878: 
"But  when  the  secret  history  of  this  bill  of  1873 
comes  to  be  told,  it  will  disclose  the  fact  that  the 
House  of  Representatives  intended  to  coin  both 
gold  and  silver,  and  intended  to  place  both 
metals  on  the  French  relation  instead  of  on  our 
own,  which  was  the  true  scientific  position  with 
reference  to  this  subject  in  1873,  but  that  the 
bill  afterward  was  doctored.  It  was  changed 
after  discussion,  and  the  dollar  of  420  grains 
was  substituted  for  it."     (Congressional  Ree- 


THE   EVOLUTION    OF   BANKING  145 

ord,  volume  7,  part  2,  Forty-fifth  Congress,  sec- 
ond session,  page  1058.)  Senator  Beck,  in  a 
speech  made  in  the  Senate,  January  10,  1878, 
said:  ''It  (the  bill  demonetizing  silver)  never 
was  understood  by  either  House  of  Congress,  I 
say  that  with  full  knowdedge  of  the  facts.  No 
newspaper  reporter — and  they  are  the  most  vigi- 
lant men  I  ever  saw  in  obtaining  information — 
discovered  that  it  had  been  done."  (Congres- 
sional Record,  volume  7,  part  1,  Forty-fifty 
Congress,  second  session,  page  260.) 

Mr.  Thurman  said :  "I  cannot  say  what  took 
place  in  the  House,  but  I  know  when  the  bill 
was  pending  in  the  Senate,  we  thought  it  was 
simply  a  bill  to  reform  the  mint,  regulate  coin- 
age, and  fix  up  one  thing  and  another,  and  there 
is  not  a  single  man  in  the  Senate,  I  think,  un- 
less a  member  of  the  Committee  from  which  the 
bill  came,  who  had  the  slightest  idea  that  it  was 
even  a  squint  toward  demonetization,"  On 
January  14,  1875,  the  same  date  that  he  signed 
the  Resumption  Act,  President  Grant  ( during 
whose  first  administration  the  silver  dollar  was 
demonetized)  sent  a  special  message  to  Congress, 
advising  the  establishment  of  mints  at  Chicago, 
St.  Louis  and  Omaha  for  the  coinage  of  silver 
dollars.  It  is  then  evident  that  the  President 
did  not  know  that  a  bill  passed  three  years  previ- 


146  THE   EVOLUTION    OF   BANKING 

ously  had  demonetized  the  U.  S.  silver  dollar. 

Here  we  certainly  have  a  strange  state  of  facts 
to  explain.  The  whole  of  official  "Washington, 
from  President  down  through  the  Cabinet,  Sen- 
ate, House  of  Eepresentatives,  officials  of  the 
mint,  newspaper  reporters  and  correspondents 
appear  to  have  been  totally  ignorant  of  the  pas- 
sage of  a  bill  that  abolished  the  coinage  of  the 
silver  dollar,  which  had  been  coined  continuously 
since  1792,  In  the  discussion  of  this  subject, 
charges  that  corrupt  means  were  used  to  secure 
this  result  have  been  advanced,  as  the  most  rea- 
sonable explanation.  The  immense  amount  of 
money  necessary  and  the  vast  army  of  individu- 
als who  would  have  to  be  influenced  secretly, 
render  this  explanation  to  be  a  most  unreason- 
able one.  There  were  at  that  time  in  Wash- 
ington, Senators  representing  the  silver  produc- 
ing states  of  the  far  West,  whose  economic  in- 
terests would  prompt  them  to  guard  with  watch- 
ful eye  the  market  for  the  product  of  the  silver 
mines  of  their  states. 

An  examination  of  the  market  quotations  for 
silver  bullion  during  the  period  under  discus- 
sion reveals  the  fact  that  in  the  year  1860  one 
thousand  silver  dollars  thrown  into  the  melting 
pot  could  be  used  as  bullion  to  pay  debts  to  the 
amount  of  one  thousand  and  forty-five  dollars. 


THE   EVOLUTION    OF   BANKING  147 

In  the  year  1870  the  same  number  of  silver  dol- 
lars after  melting  were  worth  one  thousand  and 
twenty-seven  dollars  and  in  1872  one  thousand 
and  twenty-two  dollars.  Here  then  lies  the  se- 
cret to  the  indifference  and  apathy  of  the  offi- 
cials and  the  lay  public  to  the  subject.  "Why 
should  the  owner  of  silver  bullion  take  it  to  the 
mint  w^hen  its  debt  paying  power  would  be  re- 
duced on  the  average  from  three  to  four  and  one- 
half  per  cent  after  being  coined.  This  also  ac- 
counts for  the  disappearance  from  circulation  of 
the  small  amount  of  silver  that  was  coined.  It 
found  its  way  to  the  melting  pot  and  was  ex- 
ported in  the  shape  of  bullion. 

During  the  eighty  years  that  intervened  be- 
tween 1792  and  1872  there  were  only  7,800,000 
silver  dollars  coined,  or  an  average  of  about 
100,000  dollars  a  year,  and  these  did  not  stay 
long  in  circulation.  Previous  to  the  Civil  War 
the  circulation  was  almost  entirely  in  the  f^rm 
of  bills  issued  by  the  state  banks  and  after  the 
outbreak  of  the  rebellion  legal  tender  green- 
backs, national  bank  notes,  and  postal  currency 
supplied  the  medium  needed  in  cash  transactions. 
The  people  had  been  educated  to  the  use  of  paper 
money  and  found  it  far  more  convenient  to  han- 
dle than  coins,  especially  where  the  transactions 
were  for  large  amounts.     For  a   dozen  years 


148  THE   EVOLUTION    OF   BANKING 

there  had  been  no  coins  in  circulation,  and  there 
had  never  been  a  large  amount  used  at  any  time. 
It  is  easy  enough  to  conceive  that  the  vast  ma- 
jority of  the  citizens  knew  nothing  of  the  sub- 
ject, and  even  if  the  matter  had  been  discussed 
in  Congress,  it  is  doubtful  whether  much  in- 
terest would  have  been  aroused. 

There  never  was  a  time  in  the  United  States 
when  a  large  supply  of  currency  would  not  have 
been  of  great  assistance  to  commerce  and  indus- 
try. The  owners  of  the  silver  mines  and  silver 
bullion  were  not  interested  in  the  need  by  the 
merchant  and  the  laborer  of  a  circulating  me- 
dium so  long  as  their  commodity  brought  a 
higher  price  in  the  market  than  at  the  mint. 
But  when  the  discovery  of  vast  deposits  of  rich 
silver  ores  and  the  application  of  economical 
methods  of  extracting  the  values  had  reduced 
the  market  price  of  their  commodity  to  a  point 
lower  than  its  former  mint  price,  they  suddenly 
became  solicitous  for  the  welfare  of  the  debtor 
class  and  the  working  man. 

The  doors  of  the  mint  have  been  closed  to  the 
free  coinage  of  silver.  May  they  never  be  re- 
opened. Let  us  close  the  doors  of  the  mint  to 
the  free  coinage  of  gold,  and  then,  and  not  till 
then,  will  we  know  its  value  as  a  commodity  in 
comparison  to  all  other  commodities. 


THE   EVOLUTION    OF   BANKING  149 


THE  FEDERAL  RESERVE  BANK 

The  Act  establishing  the  Federal  Reserve 
Board  was  signed  by  the  President  December 
23,  1913.  Three  days  prior  to  that  date  Pro- 
fessor J.  Laurence  Laughlin  of  the  University 
of  Chicago  addressed  the  City  Club  of  Chicago. 
His  address  was  published  in  the  Bulletin  issued 
by  the  Cl\ib,  and  under  the  sub-heading  "Passed 
by  a  Happy  Fluke ' '  occur  these  words : 

' '  Isn  't  it  something  like  a  political  miracle,  to 
think  that  in  the  Lower  House  286  men  should 
have  voted  for  it  as  against  84,  when  outside 
of  the  Banking  and  Currency  Committee  there 
were  probably  not  ten  men  in  that  House  who 
knew  anything  about  the  fundamentals  of  the 
bill!     (Laughter  and  applause.) 

"That  is  the  greatest  political  miracle  of  re- 
cent times." 

Read  this  in  connection  with  the  following  ex- 
tract from  the  Communist  Manifesto : 

"The  executive  of  the  modern  State  is  but  a 
committee  for  managing  the  common  affairs  of 
the  whole  bourgcoise  (capitalist  class)." 

Again,  Professor  Laughlin  says: 

"The  curious  thing  is  that  through  all  the 
campaign,  through  all  the  discussions  on  the 
floors  of  both  Houses  of  Congress,  practically 


150  THE   EVOLUTION   OF   BANKING 

no  attention  has  been  paid  to,  and  there  has 
been  general  acceptance  of,  the  provisions  which, 
in  my  judgment,  are  nine-tenths  of  this  achieve- 
ment. I  say  it  is  a  political  miracle  that  the 
real  fundamental  parts  of  this  bill  seem  not  to 
have  caused  any  public  discussion,  but  to  have 
been  accepted  with  the  other  parts  of  this  bill 
as  it  passed  the  Senate  last  night.  I  want  to 
emphasize,  therefore,  the  relative  unimportance 
of  the  question  regarding  notes  and  the  quan- 
tity of  money  circulating  in  the  hands  of  the 
public,  as  compared  with  the  other  thing,  which 
is  of  enormous  importance,  namely,  the  organi- 
zation of  credit. 

"In  1907  you  gentlemen  here  in  Chicago  heard 
a  great  deal  about  the  scarcity  of  money.  The 
old  fallacy  persists  all  the  way  down  that  we 
are  causing  panics  if  there  is  a  scarcity  of  money ; 
or  that  panics  can  be  cured  by  issue  of  money. 

"Now,  in  this  typical  business  situation  in 
1907,  if  a  firm  wanted  assistance  for  a  short 
period,  of  time,  if  it  needed  $200,000  in  order 
to  meet  its  obligations,  did  it  make  any  difference 
whether  there  was  more  money  circulating  in 
the  hands  of  the  public  ?  That  was  not  the  thing. 
We  were  not  lacking  in  a  medium  of  exchange, 
not  even  at  the  height  of  the  panic.  If  that 
firm  could  go  to  the  bank  and  get  a  loan  for 
$200,000,  the  first  entry  in  the  books  of  that 
bank  gives  the  borrower  a  credit  by  a  deposit 
account  of  $200,000 — the  loan  on  the  right  hand 
and  the  deposit  on  the  left;  for  the  bank  does 
a  very  simple  business,  no  different  from  any 


THE   EVOLUTION    OF   BANKING  151 

shop  in  Chicago.  The  bank  buys  the  right  to 
receive  a  certain  sum  of  money  in  the  future  and 
gives  the  borrower  the  right  to  draw  on  demand. 
A  deposit  account  is  as  much  a  demand  obliga- 
tion as  a  note.  So  far  as  the  profit  to  tlie  hank 
is  concerned,  it  makes  no  difference  wlietlier  it 
grants  tliis  liability  to  the  borrower  in  the  form 
of  a  deposit  account  or  gives  out  its  own  obliga- 
tion in  the  form  of  notes.  If,  in  the  panic  of 
1907,  that  man  wanted  to  meet  an  obligation,  is 
there  any  one  here  who  supposes  that  he  could 
not  transfer  that  claim  on  his  deposit  account 
by  a  check  that  would  meet  his  obligations  in  the 
markets  of  Chicago?" 

The  Federal  Reserve  Act  was  passed  to  pro- 
tect the  banks  from  the  inevitable  result  of  their 
own  promises  to  do  what  they  could  not  do — 
pay  their  depositors  in  cash  on  demand. 

The  position  of  the  banks  today  is  the  same 
position  as  the  state  banks  occupied  before  the 
Civil  War  so  far  as  their  demand  liabilities  are 
concerned.  The  only  change  that  has  taken 
place  is  in  the  psychology  of  the  mob. 

In  England,  from  the  beginning  of  the  bank- 
ing era  down  to  the  present  time,  the  failure 
to  redeem  in  coin  on  demand  has  always  been 
an  act  of  insolvency.  To  remain  open  for  busi- 
ness was  only  possible  through  the  suspension 
by  Parliament  of  the  Bank  Act.  The  same  was 
true  in  America  before  1860.  Charters  granted  to 


152  THE   EVOLUTION    OF   BANKING 

State  Banks  nearly  all  carried  a  forfeiture  clause 
for  failure  to  redeem  in  coin  on  demand,  but 
suspensions  were  sometimes  legalized  by  special 
act  of  the  legislature  that  granted  the  charter. 

During  the  panic  of  1893  the  banks  of  Amer- 
ica for  the  first  time  defiantly  remained  open 
while  refusing  to  pay  checks  against  deposits, 
and  have  persisted  in  the  same  conduct  in  emer- 
gencies ever  since.  It  was  to  strengthen  this 
weak  spot  that  the  Federal  Reserve  Act  was  ee- 
cured. 

The  cash  reserves  kept  by  the  banks  are  main- 
ly valuable  in  that  they  inspire  confidence  in  the 
minds  of  the  public.  During  normal  times  when 
there  is  no  excitement  the  cash  lies  dormant  in 
the  vault,  but  it  cannot  be  said  to  be  idle,  as  a 
volume  of  credit  of  from  six  to  ten  times  its 
amount  based  upon  it  is  in  circulation.  But  in 
abnormal  times,  when  the  public  refuses  to  ac- 
cept the  transfer  of  bank  credit  in  lieu  of  pay- 
ments in  cash,  the  danger  becomes  immediately 
apparent. 

The  cash  on  hand  begins  to  dwindle.  De- 
mands increase,  while  the  daily  deposits  consist 
almost  entirely  of  checks,  the  customers  hoard- 
ing the  cash  that  is  received  in  the  course  of 
business.  The  banks  refuse  to  make  new  loans 
and  insist  on  the  payment,  both  of  maturing  ob- 


THE   EVOLUTION   OF   BANKING  153 

ligations  and  such  loans  as  have  been  made  pay- 
able on  demand. 

This  does  little  good  so  far  as  the  general  situ- 
ation of  the  banks  is  concerned.  Bank  loans  are 
not  repaid  with  money,  but  by  checks  against 
credit  in  bank.  To  secure  this  credit  the  debtor 
must  sell  some  property  or  commodity  to  some 
one  who  can  pay  for  it  at  once.  To  secure  such 
a  customer  during  times  of  stress  prices  are 
slashed  and  goods  sold  far  below  the  cost  of  pro- 
duction. Market  quotations  of  stocks  and  bonds 
tumble  under  a  deluge  of  offers  to  sell. 

Eight  here  it  may  be  observed  that  bank  de- 
positors fall  into  one  of  two  classes — creditor 
depositors  or  debtor  depositors.  The  creditor  de- 
positor has  a  balance  to  his  credit  and  owes  noth- 
ing. The  debtor  depositor  has  a  balan?ce,  but 
owes  the  bank  a  note  which  he  must  pay  and 
which  his  balance  is  not  sufficient  to  meet.  He 
must  therefore  sell  something  he  owns  even  at 
a  runinous  sacrifice.  The  sale  results  merely  in 
a  transfer  of  bank  credit  from  the  account  of 
the  purchaser  to  the  account  of  the  seller.  Then 
the  credit  on  one  side  and  the  note  on  the  other 
offset  and  mutually  cancel  each  other.  The  loans 
and  discounts  on  one  side  of  the  ledger  and  the 
deposits  on  the  other  decrease  by  the  amount  of 
the  notes  paid.     It  is  thus  very  apparent  that 


154  THE   EVOLUTION    OF   BANKING 

during  the  panic  the  falling  off  of  bank  deposits 
is  not  due  entirely  to  the  withdrawing  of  cash, 
but  is  in  a  large  measure  due  to  the  cancelling 
of  credit. 

This  process  carried  to  its  logical  conclusion 
would  end  in  the  entire  disappearance  of  the 
$17,000,000,000  of  deposits  in  so  far  as  they  were 
the  results  of  credits  extended  by  the  banks  and 
do  not  represent  the  deposit  of  cash. 

In  a  panic  the  banks  are  besieged  by  crowds 
of  excited  depositors  demanding  the  withdrawal 
of  their  deposits.  They  accept  without  ques- 
tion what  is  paid  to  them.  They  receive  gold 
certificates,  silver  certificates,  trcasuiy  notes 
of  1890,  National  Bank  Notes,  legal  tenders  or 
federal  reserve  notes,  without  discrimination. 
"What  they  receive  is  a  promise  to  pay,  differing 
in  form  only  from  their  credit  on  the  bank 
ledger. 

Professor  Laughlin  says:  "A  deposit  account 
is  as  much  a  demand  obligation  as  a  note.  So 
far  as  the  profit  to  tJie  hank  is  concerned  it 
makes  no  difference  whether  it  grants  this  lia- 
bility to  the  borrower  in  the  form  of  a  deposit 
account  or  gives  out  its  o-\vn  obligation  in  the 
form  of  notes. ' '  The  statement  contained  in  this 
paragraph  is  true;  but  if  the  words  "so  far  as 
the  profit  to  the  bank  is  concerned ' '  were  elirain- 


THE   EVOLUTION    OF   BANKING  155 

ated,  the  balance  of  the  paragraph  following 
them  would  be  untrue. 

It  is  just  here  that  the  psychology  of  the  mob 
is  revealed..  Suppose  the  banks  adopted  the 
methods  in  vogue  before  bank  checks  came  into 
use,  and  issued  their  circulating  notes  to  the 
amount  of  their  present  loans  and  discounts  of 
about  $15,000,000,000  instead  of  crediting  them 
as  now  under  the  head  of  "Deposits."  The 
banks  would  be  just  as  solvent.  The  relation 
between  the  banks  and  the  public  would  have 
undergone  no  change.  The  public  would  have 
in  its  possession  demand  obligations  against  the 
banks  to  the  amount  of  $15,000,000,000  in  the 
form  of  circulating  notes.  The  banks  would 
have  in  their  possession  notes  of  individuals, 
firms  and  corporations  to  an  equal  amount  plus 
the  amount  of  the  banks'  capital  and  surplus. 
Their  published  statements  would  not  show  any 
liabilities  for  "Deposits."  Their  demand  lia- 
bilities would  be  for  "notes  in  circulation." 

But  consider  the  effect  of  such  a  condition  on 
the  minds  of  the  public.  If  a  panic  started  the 
banks  would  be  swamped  by  crowds  demanding 
the  redemption  of  the  bank  bills,  just  as  they  did 
before  the  war.  They  would  not  be  satisfied  as 
now  to  exchange  a  "promise  to  pay"  in  one  form 
for  a  "promise  to  pay"  in  another  form.    They 


156  THE   EVOLUTION   OF   BANKING 

would  demand  that  the  bills  be  redeemed  in  gold. 
Some  of  the  bills  would  be  in  the  hands  of  debt- 
ors to  the  bank,  but  to  call  in  loans  would  not 
help  any.  The  payments  would  be  made  in  bank 
notes  and  these  could  not  be  used  to  redeem  other 
bank  notes. 

The  publication  of  bank  statements,  as  at  pres- 
ent, showing  billions  of  dollars  of  deposits,  has 
a  quieting  effect  on  the  general  public.  They 
look  upon  the  possession  of  these  deposits  by  the 
banks  as  a  source  of  strength.  On  the  contrary, 
if  this  amount  was  represented  by  a  mass  of 
bank  notes  in  circulation,  the  effect  would  be  the 
very  opposite.  And  yet  the  condition  in  both 
cases  would  be  identical. 

The  Federal  Reserve  Banks  offer  a  temporary 
haven  of  refuge  in  case  of  a  run  on  the  banks 
similar  to  those  that  occurred  in  1873,  1893  and 
1907,  and  which  exhausted  the  cash  reserves  com- 
pletely, and  this  is  practicaly  the  only  purpose 
it  ever  was  intended  to  serve. 

By  means  of  this  new  Currency  Act  mem- 
ber banks  can  secure  Federal  Reserve  Currency 
to  the  extent  of  two  and  one-half  times  the 
amount  of  gold  they  may  have  on  hand  by  de- 
positing as  security  notes,  drafts  and  bills  of  ex- 
change arising  out  of  actual  commercial  transac- 


THE   EVOLUTION    OF   BANKING  157 

tions.  These  notes  are  a  first  and  paramount 
lien  on  all  the  assets  of  the  issuing  bank. 

They  are  obligations  of  the  United  States  and 
redeemable  in  gold  by  the  Treasury  Department 
at  Washington,  D.  C,  or  in  gold  or  lawful  money 
(Legal  Tenders)  at  any  Federal  Eeserve  Bank. 

The  Act  of  March  14,  1900,  bound  the  United 
States  to  maintain  the  parity  of  all  forms  of 
money  issued  or  coined  by  the  United  States. 
Under  this  act  the  United  States  at  present 
would  be  obliged  to  redeem  in  gold  about  $1,- 
800,000,000  of  outstanding  obligations  if  the  de- 
mand were  made.  These  consist  of  National 
Bank  notes,  of  which  there  are  $814,000,000 ;  sil- 
ver dollars,  $565,000,000 ;  greenbacks,  $346,000,- 
000,  and  on  May  1,  1915,  there  were  $53,000,000 
Federal  Reserve  notes  in  circulation.  There  is 
in  the  United  States  Treasury  to  redeem  all  this 
a  reserve  fund  of  $150,000,000,  or  about  9  per 
cent  plus  a  relatively  small  amount  in  the  work- 
ing cash  balance.  To  this  $1,800,000,000  must 
be  added  the  amount  of  Federal  Reserve  notes, 
which  may  be  issued  in  the  future,  the  amount  of 
which  cannot  be  accurately  estimated.  There  is 
in  the  United  States  at  the  present  time  $1,889,- 
000,000  in  gold,  approximately  one-half  of  which 
is  held  by  the  banks,  the  balance  being  in  circu- 
lation.    There  is  here  a  potential  basis  for  the 


158  THE   EVOLUTION    OF   BANKING 

issue  of  over  $2,000,000,000  in  Federal  Reserve 
notes. 

It  is  only  a  question  of  time  or  events  that 
will  force  the  fiction  of  a  gold  basis  to  be  aban- 
doned. The  sole  basis  of  value  is  labor.  The 
value  of  any  commodity  is  the  average  socially- 
necessary  labor  time  needed  to  produce  it. 

"Trade  in  general  being  nothing  else  but  the 
exchange  of  labor  for  labor,  the  value  of  all 
things  is,  as  I  have  said  before,  most  justly  meas- 
ured by  labor." — Benjamin  Franklin,  1727. 

"Money  should  be  merely  a  receipt,  an  evi- 
dence that  the  holder  of  it  has  either  contributed 
certain  value  to  the  national  stock  of  wealth  or 
that  he  has  acquired  a  right  to  the  same  value 
from  someone  who  has  contributed  it." — John 
Gray,  1831. 

"Labor  alone,  therefore,  never  varying  in  its 
own  value,  is  the  ultimate  and  real  stand- 
ard by  which  the  value  of  all  commodities  can 
at  aU  times  and  places  be  estimated  and  com- 
pared. It  is  their  real  price;  money  is  their 
nominal  price  only." — Adam  SmitJi, '' Wealth  of 
Nations." 


THE   EVOLUTION   OF   BANKING  159 

THE  FLUCTUATING  VALUE  OF  GOLD 

No  statistics  showing  the  comparative  cost  of 
producing  gold  at  different  periods  appear  to 
be  available. 

The  modern  improvements  in  the  methods  of 
mining,  milling,  and  treating  gold  and  silver 
ores  have  been  so  great  that  the  cost  of  pro- 
duction must  be  now  a  fraction  of  what  it  was 
before  the  introduction  of  the  stamp  mill. 

The  Spanish  and  Mexican  methods  of  ex- 
tracting the  values  were  of  the  crudest  char- 
acter— only  the  surface  veins  were  worked  and 
these  only  to  a  shallow  depth,  as  there  were  no 
facilities  for  draining  or  ventilating  the  mines. 
The  ore  was  brought  to  the  surface  in  sacks 
carried  on  the  backs  of  enslaved  Indians  or 
convicts. 

There  was  no  hoisting  machinery  and  the 
ladders  used  were  trees  from  which  the  limbs 
had  been  lopped  off  fairly  close  to  the  trunk. 

The  milling  was  done  in  an  arastra.  This 
consisted  of  a  space  perhaps  twenty  feet  or  so 
in  diameter,  enclosed  by  a  low  stone  wall.  The 
floor  of  the  arastra  was  flagged  with  flat,  smooth 
stones.  In  the  center  was  a  capstan,  with  cap- 
stan bars  extending  beyond  the  enclosing  wall, 
to  which  mules  or  oxen  were  hitched.    Large, 


160  THE   EVOLUTION    OF   BANKING 

heavy  blocks  of  stone  were  attached  to  the  cap- 
stan bars  by  chains  and  the  ore  w^as  dumped 
in  and  the  mules  or  oxen  were  started  on  their 
ceaseless  rounds.  The  heavy  blocks  of  stone 
crushed  and  pulverized  the  ore  and  released 
the  metals  contained  therein.  A  small  stream 
of  water  flowing  in  on  one  side  and  overflowing 
at  the  other  side  carried  away  the  tailings. 
Quicksilver  scattered  over  the  floor  of  the 
arastra  caught  and  held  the  gold  and  silver,  but 
it  is  needless  to  say  that  a  large  proportion  of 
the  values  were  lost  by  this  crude  method. 

When  we  compare  the  Mexican  arastra  with 
the  modern  stamp  mill  driven  by  steam  or  elec- 
tricity and  the  use  of  hoisting,  ventilating  and 
pumping  apparatus,  rock  drills  driven  by  com- 
pressed air  and  the  cyanide  process  for  extract- 
ing the  last  cent  of  value,  it  is  well  within 
reason  to  believe  that  gold  is  now  produced  at 
a  fraction  of  the  former  cost. 

Ever  since  money  was  invented  there  has 
been  a  continual  effort  to  increase  its  volume. 

The  almost  universal  practice  of  debasing  the 
coinage  during  the  medieval  period  was  not 
because  of  the  dishonesty  of  kings  or  govern- 
ments, but  in  a  large  measure  on  account  of 
the  necessity  for  more  coins  to  transact  the 
growing  commerce  of  the  age.     Without  in- 


THE   EVOLUTION    OF   BANKING  161 

creasing  the  volume  and  use  of  money,  barter 
could  never  have  developed  into  commerce. 

In  this  development  gold  has  played  an  im- 
portant and  useful  role.  But  the  time  has  ar- 
rived when  it  must  give  way  to  a  better  and 
more  scientific  medium. 

The  employment  of  labor  in  producing  the 
wealth  needed  to  support  the  race  should  not 
depend  upon  the  accidents  of  nature  in  placing 
the  veins  of  gold-bearing  ore  where  they  can 
be  reached  and,  also,  upon  the  further  accident 
of  their  being  discovered. 

It  is  not  reasonable  to  suppose  that  if  nature, 
in  her  niggardliness,  had  failed  to  create  the 
metals,  gold  and  silver,  that  the  inventive 
genius  of  man  would  have  failed  to  supply  some 
other  medium  of  exchange.  The  truth  is  that 
man  has,  through  the  use  of  the  credit  system, 
devised  a  means  whereby  commodities  have 
been  produced  and  exchanged  to  an  extent  that 
would  have  been  impossible  by  the  use  of  gold 
and  silver  alone. 

It  is  also  true  that  efforts  to  increase  the 
volume  of  money  have  in  some  cases  in  the  past 
ended  in  disaster.  But  those  failures  prove 
nothing  except  that  the  nature  and  function  of 
money  was  not  understood.  This  being  the 
fact,  the  experiments  were  bound  to  be  failures. 


162  THE   EVOLUTION   OF   BANKING 

Money  represents  service.  It  is  a  credit  in 
the  hands  of  its  possessor.  It  is  evidence  of  an 
exchange  where  the  service  on  one  side  has 
been  postponed  by  agreement.  It  is  evidence 
of  a  debt  owed  by  the  issuer.  It  is  good  money 
and  will  pass  current  if  the  issuer  is  known  to 
be  solvent  and  able  to  redeem.  It  is  bad  money 
if  there  is  a  doubt  as  to  the  ability  or  intention 
of  the  issuer  to  redeem  as  agreed.  Gold  is  not 
a  good  money.  It  is  a  commodity  and  fluc- 
tuates in  value.  Its  minimum  value  is  fixed  by 
the  coinage  laws  of  nations^  The  value  of  an 
ounce  of  gold  at  the  United  States  mint  is 
$20.67,  regardless  of  the  cost  of  production. 

If  mountains  of  gold  ore  were  discovered 
where  the  cost  of  extracting  the  gold  was  only 
one  dollar  a  ton,  the  fortunate  owner  could  still 
take  the  product  to  the  mint  and  have  it  minted 
into  coins  with  the  same  debt-paying  power  as 
formerly,  and  could  continue  to  do  so  until  the 
coinage  laws  were  changed  to  fit  the  new  condi- 
tions. 

In  the  meantime,  the  fall  in  the  value  of  gold 
could  only  be  recorded  in  the  rise  in«^  he  market 
price  of  all  other  commodities. 

If  a  traveler  from  Altruria  should  land  in 
America  and,  in  reply  to  his  inquiries,  be  told 
that  wheat  was  selling  at  one  dollar  a  bushel, 


THE   EVOLUTION    OF   BANKING  163 

corn  at  fifty  cents  a  bushel,  eggs  at  twenty-five 
cents  a  dozen,  and  that  gold  was  minted  at 
twenty  dollars  an  ounce,  he  could  easily  see 
that  an  ounce  of  gold  would  buy  twenty  bushels 
of  wheat  or  forty  bushels  of  corn  or  eighty 
dozen  of  eggs.  And,  if  on  arriving  on  a  second 
visit,  he  was  told  that  wheat  was  two  dollars  a 
bushel,  corn  one  dollar  a  bushel,  and  eggs  fifty 
cents  a  dozen,  he  would  conclude  that  com- 
modities had  risen  one  hundred  per  cent.  But 
when  he  found  that  gold  was  still  being  minted 
at  the  old  rate  of  twenty  dollars  an  ounce,  and 
that  an  ounce  of  gold  would  buy  only  one-half 
of  the  commodities  it  formerly  would,  it  would 
be  obvious  that  the  value  of  commodities  had 
not  risen  100  per  cent,  but  that  gold  had  fallen 
50  per  cent  in  its  purchasing  power. 

This,  in  effect,  is  what  happened  after  the 
discovery  of  America. 

The  product  of  the  mines  of  Mexico  and 
Peru  was  sent  to  Europe  and  Humboldt  esti- 
mates that  general  prices  had  risen  by  the  18th 
century  294  per  cent.  The  purchasing  power 
of  the  precious  metals  had  fallen  to  one-third 
of  what  it  had  formerly  been.  Arthur  Young 
computed  the  rise  in  the  price  of  commodities 
to  be  280  per  cent  during  the  same  period, 
while  Jacob  claimed  a  rise  of  450  per  cent. 


164  THE   EVOLUTION    OF   BANKING 

Professor  Jevons,  in  his  "Money  and  the 
Mechanism  of  Exchange,"  says  fhat  gold  "be- 
tween 1789  and  1809  fell  in  the  ratio  of  100  to 
54,  or  by  46  per  cent.  From  1809  to  1849  it 
rose  again  in  the  extraordinary  ratio  of  100  to 
245,  or  by  145  per  cent,  rendering  government 
annuities  and  all  fixed  payments,  extending 
over  this  period,  almost  two  and  a  half  times  as 
valuable  as  they  were  in  1809.  Since  1849  the 
value  of  gold  has  again  fallen  to  the  extent  of 
at  least  20  per  cent ;  and  a  careful  study  of  the 
fluctuation  of  prices  shows  that  fluctuations  of 
from  10  to  25  per  cent  occur  in  every  credit 
cycle." 


THE   EVOLUTION    OF   BANKING  165 

MONEY 

(INTER\^EW    WITH    MR.    HENRY   D.    LLOYD    IN    THE 
CHICAGO  CHRONICLE,  JANUARY  10,  1897.) 

' '  I  have  no  theory, ' '  said  Mr.  Lloyd,  ' '  no  new 
kind  of  money  to  propose.  But  as  a  student 
of  events  I  have  my  ideas  of  the  tendency  of 
monetary  systems  as  they  exist  today,  and  am 
endeavoring  to  suggest  remedies  for  evils  whose 
existence  or  imminence  all  close  observers  must 
admit. 

"The  financial  system  in  England  and  the 
United  States  presents  many  points  of  similar- 
ity. In  fact,  we  have  borrowed  the  ideas  of 
English  financiers — have  originated  practically 
nothing,  but  have  been  mere  slavish  imitators. 
The  present  English  sj'stem  dates  from  the  Bank 
of  England  Act  of  1694;  the  American  system 
originated  with  greenbackism  in  the  early  years 
of  the  war  of  the  rebellion.  The  English  de- 
monetized silver  in  1816,  and  the  bank  act  of 
1844  made  the  unpardonable  mistake  of  caus- 
ing the  circulation  of  paper  money  to  fluctuate 
with  the  amount  of  gold  and  silver  on  hand. 
This  system  put  the  cart  before  the  horse,  by 
making  the  amount  of  industry  dependent  upon 
the  volume  of  the  currency,  whereas  the  true 
system  is  the  opposite — the  graduation  of  the 


166  THE   EVOLUTION   OF   BANKING 

amount  of  currency  according  to  the  value  of 
the  productive  industry  of  the  country.  This 
system  has  been  the  parent  of  panics,  A  finan- 
cial panic  is  worse  than  a  war.  Its  dead  and 
wounded  are  found  in  every  household  through- 
out the  length  and  breadth  of  the  land.  There 
has  long  been  a  condition  of  perpetual  panic. 
We  have  been  passing,  as  it  were,  from  one  fit 
to  another  with  little  time  intervening  for  re- 
cuperation and  recovery. 

"Apart  from  the  exchanges  necessary  in  the 
retail  trade  the  uses  of  money  are  but  few.  In 
large  business  transactions  currency  is  used 
only  ill  the  settlement  of  balances.  Credit  does 
99  per  cent  of  the  business  of  the  country.  The 
real  problem,  therefore,  of  the  present  time  is 
the  very  serious  dislocation  of  the  credit  sys- 
tem, which  has  resulted  in  a  perfect  paroxysm 
of  panics.  Money  itself  is  only  important  as 
far  as  it  affects  credit.  The  banks  do  business 
on  a  preposterous  and  impossible  pretense  of 
paying  all  depositors  on  demand.  This  is  ab- 
surd. The  strongest  of  these  concerns  would 
be  forced  to  the  wall  if  suddenly  called  upon  to 
fulfill  their  contract  with  depositors.  They 
could  not  procure  the  money. 

"In  order  to  do  business  it  is  necessary  that 
the  banks  should  have  an  ample  reserve  fund. 


THE   EVOLUTION    OF   BANKING  167 

Under  existing  circumstances  a  large  cash  bal- 
ance must  be  kept.  The  railroad  corporations 
and  individuals  engaged  in  trade  are  the  chief 
elements  that  require  ready  money.  Their  obli- 
gations to  laborers  and  tradesmen  must  be  dis- 
charged in  cash.  Aside  from  these  avenues  lit- 
tle actual  money  is  needed,  and  it  is  not  neces- 
sary that  this  little  should  be  gold.  Civiliza- 
tion has  used  up  all  the  supply  of  gold  for  its 
reserves.  There  is  not  gold  enough  in  the  world 
for  the  uses  of  business,  nor  yet  for  the  bank 
reserves.  Many  times  the  exigencies  of  business 
compel  the  banks  to  withdraw  their  reserves, 
and  the  public  finds  that  there  is  not  enough  of 
either  credit  or  currency  for  its  uses.  Hence  the 
nervousness,  often  recurring,  that  results  in 
withdrawals  of  deposits  and  subsequent  panics. 
' '  The  fact  that  the  New  York  Clearing  House 
Association  has  been  compelled  four  times  with- 
in the  past  twenty  years  to  issue  its  certificates 
to  make  good  the  balances  of  the  banks  is  an  evi- 
dence of  the  unwisdom  of  the  existing  system. 
But  right  here  is  the  germ  of  the  currency  of 
the  future.  By  the  issue  of  these  certificates 
all  manner  of  securities  representing  valuable 
commodities  are  transformed  into  currency.  It 
is  the  coinage  of  commodities  for  the  purpose 
of  creating  money  for  the  use  of  the  banks  in 


168  THE   EVOLUTION    OF   BANKING 

time  of  panic.  How  easy  it  would  be  to  apply 
a  like  principle  for  supplying  the  people  of  the 
whole  country  with  money  as  they  require  it! 

"One  of  the  most  successful  attempts  at  the 
coinage  of  commodities  took  place  in  the  colony 
of  Pennsylvania.  During  the  period  between 
1720  and  1770 — fifty  years — the  colony  issued 
$3,000,000  in  currency  on  the  security  of  the 
lands  and  commodities — on  leases  or  land — for  a 
given  period,  varying  from  five  to  ten  years. 
Benjamin  Franklin,  who  was  the  originator  of 
the  plan,  called  it  the  coinage  of  land.  The 
success  of  the  experiment — for  it  was  success- 
ful in  the  highest  degree — is  a  striking  refuta- 
tion of  the  present  claims  that  such  a  plan  is  im- 
practicable. 

' '  A  similar  experiment  was  tried  in  the  Island 
of  Guernsey,  with  equal  success.  The  people 
wanted  to  build  a  market  house,  but  they  had 
no  money.  Labor,  lumber,  stone,  etc.,  there  was 
in  abundance.  The  authorities  in  this  emergency 
issued  paper  notes  of  one  pound  each,  which 
were  given  in  exchange  for  the  work  and  mate- 
rial needed.  These  notes  were  made  receivable 
for  the  rent  of  stalls  in  the  market,  and  had  a 
ready  circulation  among  the  people.  Each  year 
a  portion  of  the  notes  was  returned  to  the  cor- 
poration for  rents  and  other  dues,  and  as  fast 


THE   EVOLUTION    OF   BANKING  169 

as  received  were  publicly  burned.  At  the  end 
of  ten  years  all  the  notes  had  been  thus  returned 
and  destroyed,  and  the  market  house,  costing 
some  $25,000 — a  considerable  sum  for  a  poor 
community — stands  today  a  monument  to  the 
ability  of  a  people  to  break  loose  from  gold  and 
silver.  The  same  system  has  been  resorted  to 
on  other  occasions  in  various  places,  and  always 
with  like  good  results,  and  it  can  easily  be 
adopted  by  any  government  to  the  extent  of  the 
taxes  levied  upon  and  received  from  the  peo- 
ple. 

"The  banks  of  the  country  are  trying  to  de- 
vise means  for  the  prevention  of  panics.  In 
1893  the  finances  of  New  York  and  Boston  were 
threatened  with  large  withdrawals  of  deposits. 
The  times  were  panicky  and  all  conditions  por- 
tended a  money  stringency.  The  banks  ab- 
solutely refused  to  pay  out  money,  even  upon 
checks  against  deposits.  They  did  not  formally 
suspend  business;  they  simply  refused  to  pay 
out  money  on  demand,  as  had  been  their  cus- 
tom, and  many  rich  men,  with  ample  funds  on 
deposit,  were  unable  to  procure  enough  currency 
to  pay  their  expenses  at  the  World's  Fair  held 
in  Chicago.  The  business  community  approved 
the  course  of  the  bankers,  and  after  the  flurry 
had  passed  the  old  customs  were  restored.    This 


170  THE   EVOLUTION   OF   BANKING 

action  doubtless  prevented  a  widespread  and  dis- 
astrous panic, 

"It  is  not  generally  known,  but  it  is  a  fact 
nevertheless,  that  at  the  time  of  the  failure  of 
the  Baring  Brothers'  Bank  in  London  the  Bank 
of  England  was  on  the  verge  of  failure.  Not- 
withstanding all  the  safeguards  which  the  gov- 
ernment had  placed  around  the  institution  its 
reserve  was  fast  disappearing,  and  but  for 
timely  assistance  would  have  vanished  altogether. 
The  Bank  of  France  came  to  its  rescue  with  a 
loan  of  3,000,000  Pounds  Sterling,  and  the  gov- 
ernment, through  Lord  Salisbury,  then  premier, 
extended  a  helping  hand,  and  a  financial  catas- 
trophe without  a  parallel  in  the  history  of  mod- 
ern civilization  was  averted, 

"The  closer  union  of  the  banks  of  the  United 
States  recently  manifest  is  evidence  of  a  desire 
on  their  part  to  prevent  the  recurrence  of  panics. 
That  they  may  arrive  at  adequate  means  is  sin- 
cerely to  be  hoped,  yet  there  must  be  a  radical 
change  in  the  banking  system  before  perfect 
safety  can  be  attained, 

"Much  as  the  sub-treasury  scheme  of  the 
western  farmers  was  derided  during  the  agita- 
tion of  several  years  ago,  it  was  a  rational  one, 
and  may  eventually  form  a  part  of  our  fiscal 
system.    The  plan  contemplated  the  loan  by  the 


THE   EVOLUTION   OF   BANKING  171 

government — perhaps  it  should  be  called  an  ad- 
vance— of  a  portion  of  the  value  of  farm  prod- 
ucts, such  as  wheat,  corn,  vegetables  and  seeds, 
that  could  be  stored  in  warehouses  just  as  whisky 
is  stored  today,  and  sold  by  the  government  in 
case  of  forfeiture,  but  which  in  any  event  would 
bring  an  ample  return  for  the  money  advanced. 
These  commodities,  of  course,  should  be  nego- 
tiated at  the  option  of  the  government.  The 
system,  to  be  sure,  would  lead  to  government 
control  of  the  warehouses  of  the  country.  I 
hope  it  would.  The  outrages  perpetrated  by  the 
warehouse  men  upon  the  producing  classes  are  so 
grievous  as  to  demand  some  radical  measure  of 
relief.  The  system,  in  essence,  is  that  under- 
lying the  clearing  house  certificates  used  so  fre- 
quently among  financiers — the  issue  of  money 
based  upon  something  of  tangible  value — and 
the  practice  would  be  attended  with  little  risk. 
The  warehouses  could  be  placed  under  a  sys- 
tem of  inspection  similar  to  that  in  the  bonded 
warehouses  in  which  whisky  is  now  stored,  and 
as  the  government  need  advance  no  more  than 
75  per  cent  of  the  value  of  the  commodities,  the 
security  would  be  ample  against  any  possible 
fluctuations  in  the  market  price. 

"  It  is  claimed  that  the  system  I  propose  would 
create  an  army  of  federal  office  holders.     I  do 


172  THE   EVOLUTION   OF   BANKING 

not  regard  this  as  an  evil.  It  is  time  the  govern- 
ment gave  something  to  the  people  instead  of 
lavishing  its  bounty  upon  the  monopolists.  "We 
have  had  too  many  exhibitions  of  favoritism 
toward  the  class  that  seeks  to  control  all  com- 
merce and  to  dictate  to  labor.  Give  the  poor 
man  a  chance,  even  though  it  might  multiply 
the  number  of  officeholders.  One  thing  is  cer- 
tain ;  if  the  present  monetary  system  based  only 
on  gold  is  continued  it  will  result  in  a  rapid 
succession  of  panics.  It  is  the  part  of  a  wise 
people  to  read  the  signs  of  the  times,  and  adopt 
in  advance  such  means  as  will  give  them  com- 
fort, happiness  and  independence. 

"At  first  I  was  disposed  to  look  with  favor 
upon  the  free  silver  movement,  but  observation 
has  convinced  me  that  it  is  reactionary,  revolu- 
tionary, mischievous  and  full  of  disaster.  While 
I  think  demonetization  was  a  crime,  the  remedy 
is  not  to  go  back  to  the  status  quo  ante,  but  to 
go  onward  to  a  better  system.  There  was  never 
a  successful  system  of  bimetallism  that  tied  the 
two  metals  together  at  other  than  their  market 
value.  The  only  alternative  of  the  free  silver 
men  is  to  choose  between  two  panics.  If  silver 
is  coined  at  its  market  value  it  will  necessarily 
contract  the  currency  by  depreciating  the  pur- 
chasing power  of  the  silver  already  coined.    If 


THE   EVOLUTION   OF   BANKING  173 

the  present  ratio  is  to  be  maintained,  free  coin- 
age will  drive  all  the  gold  from  circulation,  and 
again  contraction  will  be  the  result.  The  free 
coinage  men  remind  me  of  the  cowbird,  w^hich 
steals  the  nest  of  other  feathered  creatures  only 
to  befoul  them. 

"Money  is  merely  an  intermediary  between 
the  producer  and  the  consumer.  Many  as  are 
the  difficulties  in  the  way  of  the  proper  arrange- 
ments of  fiscal  affairs,  I  have  every  confidence 
in  the  wisdom  of  the  people.  If  they  are  only 
left  alone  they  will  find  a  way  out.  The  trou- 
ble at  present  is  that  everything  is  monopolized. 
We  are  living,  as  it  were,  in  a  condition  of  in- 
dustrial closure.  The  people  are  not  able — are 
not  permitted — to  use  their  labor  to  their  own 
best  advantage. 

"To  sum  up.  I  care  nothing  for  any  sj'stem 
of  economics  that  does  not  include  co-operation 
and  anti-monopoh^  Call  it  socialism  if  you  will, 
I  do  not  care.  It  is  the  only  system  that  will 
bring  ultimate  and  entire  relief  from  the  ex- 
isting evils.  The  people  of  the  community  are  as 
able  to  co-operate  as  the  people  of  a  corporation. 

"Co-operation  is  a  positive  idea;  anti-monop- 
oly is  negative.  With  the  institution  of  these 
will  come  a  system  of  finance  and  of  all  other 
things  that  will  go  toward  making  a  paradise 


174  THE   EVOLUTION   OF   BANKING 

of  this  world  of  ours.  The  perpetual  fear  of 
poverty  and  panics  is  absurd — a  delusion.  The 
people  will  not  submit  to  it  long.  There  is  too 
much  going  to  waste — of  food  and  all  other 
things  that  contribute  to  the  comfort  and  happi- 
ness of  men — to  permit  of  the  people  believing 
there  is  any  good  reason  in  nature  for  the  pov- 
erty that  grinds  and  the  want  that  kills." 


CONCLUSION 

The  division  of  Labor  caused  the  invention  of 
money.  As  soon  as  money  was  invented  and 
came  into  use  to  any  considerable  extent, 
means  were  taken  to  introduce  substitutes  or 
representatives  which  were  of  nominal  value. 

The  earliest  mediums  of  exchange  used  were 
the  skins  of  animals.  When  these  were  too 
bulky  and  inconvenient  to  handle,  a  small 
irregular  piece  was  cut  out  of  the  skin.  This 
was  the  token  that  the  skin  from  which  it  had 
been  cut  belonged  to  the  holder  of  the  small 
bit  of  leather,  and  ownership  was  proved  by 
fitting  it  into  the  place  from  which  it  had  been 
cut. 

Leather  money  was  used  by  the  Cartha- 
ginians and  Romans  and  was  in  circulation  in 


THE   EVOLUTION    OP   BANKING  175 

Russia  as  late  as  the  reign  of  Peter  the  Great. 

Paper  money  was  in  circulation  in  China  four 
or  five  hundred  years  before  it  was  issued  by 
the  Bank  of  England,  and  the  Emperor  of  Tar- 
tary  issued  both  paper  and  leather  money 
during  the  fourteenth  century. 

The  use  of  skins  as  a  medium  of  payment 
was  nearly  universal  in  the  early  history  of 
America.  The  transactions  of  the  Hudson  Bay 
Company  were  based  on  "skins."  One  beaver 
skin  was  supposed  to  be  worth  two  shillings; 
twenty  skins  would  pay  for  a  gun  worth  about 
forty  shillings.  Sometimes  a  gun  was  sold  by 
standing  it  upright  on  the  ground  and  piling 
skins  beside  it  until  the  pile  reached  as  high  as 
the  muzzle  of  the  gun.  All  kinds  of  skins  were 
included  and  the  pile  would  contain  not  only 
coon,  beaver  and  deer  skins,  but  often  sea  otter, 
arctic  fox  and  other  rare  and  valuable  furs. 
This  method  of  dealing  with  the  Indians  and 
trappers  undoubtedly  explains  why  the  guns 
of  that  period  had  such  extraordinarily  long 
barrels. 

During  Colonial  days  in  America  not  only 
were  beaver  and  coon  skins  used  as  money, 
but  also  musket  balls.  Wampum,  which  was 
made  by  the  Indians  out  of  shells  and  which 
they  strung  in  the  shape  of  belts,  was  another 


176  THE   EVOLUTION    OF   BANKING 

medium  of  exchange  and  was  made  legal  tender 
in  Massachusetts  to  the  amount  of  forty  shil- 
lings. Cows  were  also  legal  tender  for  taxes, 
but,  as  might  be  expected,  the  thrifty  New 
Englanders  always  paid  with  the  scrawniest 
specimens. 

In  Virginia  and  Maryland,  on  account  of  the 
scarcity  of  coin,  corn  and  tobacco  were  used 
in  payment  of  debts — the  tobacco  at  the  rate 
of  three  shillings  per  pound,  and  a  refusal  to 
accept  carried  a  penalty  of  three  years  at  hard 
labor.  Women  brought  over  from  England  by 
the  London  Company  were  sold  to  the  settlers 
as  wives  for  one  hundred  pounds  of  tobacco. 
The  price  was  afterwards  raised  to  one  hundred 
and  fifty  pounds. 

In  the  West  Indies  raw  produce,  such  as 
sugar,  rum,  molasses,  ginger,  indigo  and  to- 
bacco, was  similarly  used.  In  Newfoundland 
dried  codfish  was  used  at  a  very  recent  period. 
Every  country  of  Europe  and  Asia  gives  evi- 
dence of  the  use  of  vegetable  and  manufactured 
products  as  money. 

Wheat  from  the  time  of  ancient  Greece  to 
the  present  has  been  used,  and  in  Norway  it 
was  deposited  in  banks  and  borrowed  and  lent. 

Along  the  shores  of  the  Mediterranean  olive 
oil  and  in  some  places  almonds  were  used,  as 


THE   EVOLUTION    OF   BANKING  177 

was  also  salt  in  Abysinnia,  Mexico  and  Su- 
matra, and  in  the  latter  country  cubes  of 
beeswax. 

In  Western  China  and  Thibet  tea  pressed 
into  small,  hard  cubes,  called  ''brick  tea," 
passes  current.  Fiji  Islanders  have  a  currency 
in  whales'  teeth  and  one  red  one  is  of  the  same 
value  as  twenty  white  ones. 

In  passing  from  barter,  or  the  use  of  vegeta- 
ble or  manufactured  articles,  to  metallic  coins 
as  money,  an  evident  attempt  was  made  to  con- 
nect the  coin,  either  by  shape  or  design,  with 
the  article  it  v/as  supposed  to  represent.  In 
China  cloth  and  knives  having  to  a  certain 
extent  been  used  as  a  standard  of  value,  the 
earliest  coins  were  made  to  resemble  pieces  of 
cloth  or  knives.  In  ancient  Rome  the  substitu- 
tion of  coins  for  cattle  was  marked  by  the 
impressing  upon  the  coin  a  design  of  an  ox 
or  sow. 

The  transportation  of  any  considerable 
amount  of  gold  or  silver  coins  was  attended 
with  a  large  amount  of  labor  and  risk,  and  this 
was  obviated  by  depositing  the  coins  in  bank 
and  transferring  the  title  by  means  of  a  bill  of 
exchange. 

The  Bank  of  Venice  and  the  various  banks 
of  deposit  in  Europe  are  prominent  milestones 


178  THE   EVOLUTION    OF   BANKING 

which  mark  the  path  of  progress  from  primitive 
barter  to  an  ideal  financial  system.  The  expe- 
rience thus  gained  aided  in  the  further  exten- 
sion of  the  use  of  book  accounts  in  transferring 
credits  or  offsetting  debts. 

The  traders  of  medieval  Europe  had  a  method 
of  offsetting  debts  that  closely  resembles  the 
modern  system  of  clearing  checks  by  banks 
today.  The  great  fairs  that  were  formerly 
held  all  through  Europe  during  the  middle 
ages  were  attended  by  traders  from  many 
countries,  who  came  with  long  caravans,  and 
exchanged  the  merchandise  manufactured  in 
their  country  for  the  goods  brought  to  the  fair 
by  the  traders  from  other  countries. 

The  retail  trade  in  these  fairs  bore  only  a 
small  proportion  to  the  whole  volume,  the 
largest  share  of  the  trade  being  in  bulk  between 
traders.  At  the  close  of  the  fair  they  met  in  a 
large  room  for  the  purpose  of  settling  their 
accounts.  This  was  accomplished  by  mutually 
offsetting  their  debts  and  credits  with  each 
other,  only  the  differences,  which  were  usually 
small,  being  paid  in  cash.  Boisguilbert  tells  of 
one  fair  held  at  Lyons,  France,  at  the  close  of 
which  debts  to  the  amount  of  80,000,000  francs 
were  thus  balanced  against  each  other  without 
the  use  of  a  single  coin. 


THE   EVOLUTION   OF   BANKING  179 

About  the  year  1775  or  1780,  after  the  use  of 
bank  checks  was  introduced,  the  clerks  of  some 
of  the  London  bankers  instead  of  going  to  each 
bank  to  collect  the  money  on  the  checks,  made 
an  arrangement  with  each  other  to  meet  at  a 
certain  place  and  "swap"  their  checks,  after- 
wards paying  the  difference  only  in  cash.  The 
safety  and  convenience  of  this  method  led  a 
few  of  the  London  bankers — then  all  private 
bankers — to  rent  a  room  where  their  clerks 
could  meet  privately  and  exchange  their 
checks,  notes,  and  bills.  It  was  kept  a  profound 
secret  from  the  public,  and  a  number  of  bank- 
ers refused  to  join,  as  they  believed  it  to  be  a 
very  questionable  business  arrangement.  But 
as  time  Avent  on  the  economy  of  time,  as  well  as 
work,  together  with  the  elimination  of  the  risk 
consequent  on  uselessly  transporting  coins 
daily  through  the  street  from  one  bank  to  the 
other,  and  then  back  again,  won  the  day,  and 
since  then  the  Clearing  House  has  become  a 
highly  respectable  institution. 

The  Clearing  House,  as  at  first  established, 
was  a  great  labor-saving  institution,  and  saved 
the  use  of  money  between  banks  in  the  pay- 
ment of  checks,  except  for  the  balances,  which 
average  only  about  5  per  cent  of  the  total. 

But  even  this  5  per  cent  is  not  now  paid  in 


180  THE   EVOLUTION   OF  BANKING 

the  majority  of  Clearing  Houses.  In  London 
all  the  member  banks,  and  the  Clearing  House 
itself,  keep  an  account  with  the  Bank  of  Eng- 
land, and  the  differences  are  settled  by  means 
of  checks,  which  transfer  the  amounts  from  one 
account  to  the  other  on  the  books  of  the  Bank 
of  England. 

It  will  thus  be  seen  that  the  immense  com- 
merce of  England  is  carried  on  by  means  of 
book  accounts,  bills  of  exchange,  and  checks, 
and  these  latter  are  paid  and  cancelled  without 
the  use  of  a  single  coin  or  bank  bill.  This  also 
includes  the  country  banks  of  England,  who 
are  also  members  and  whose  checks  are  cleared 
through  the  Clearing  House. 

The  same  is  true  to  a  large  extent  in  this 
country.  "While  in  some  Clearing  Houses  in 
America  balances  are  presumably  paid  in  cash, 
they  are  in  a  large  number  of  cases  ''traded" — 
the  banks  having  credit  balances  giving  orders 
on  the  Clearing  House  to  the  debtor  banks 
with  which  to  pay  their  debit  balances. 

These  orders  are  paid  for  by  a  cashier's 
check,  which  goes  through  the  Clearing  House 
the  next  day. 

In  the  Philadelphia  Clearing  House  no  money 
whatever  is  used,  as  they  have  adopted  the 
London  system  of  paying  balances  by  check. 


I 


THE   EVOLUTION    OF   BANKING  181 

In  the  smaller  towns  the  banks  exchange  checks 
with  one  another  and  the  difference  is  settled 
by  giving  a  bank  draft  on  Chicago  or  New 
York.  In  times  of  panic  the  New  York  and 
Chicago  Clearing  Houses  revert  to  the  use  of 
Clearing  House  certificates  in  place  of  money 
in  paying  balances. 

It  ought  to  be  patent  to  any  one  watching 
the  current  of  events  that  money  in  the  gener- 
ally accepted  sense  is  becoming  obsolete  as  a 
means  of  exchanging  services  or  commodities. 
This  work,  formerly  done  with,  a  vast  amount 
of  labor  and  risk,  is  now  being  done  in  an  enor- 
mously increased  volume,  in  a  convenient,  safe 
and  economical  manner,  by  means  of  book  ac- 
counts, bills  of  exchange,  checks  and  the 
clearing  system. 

The  coins  of  America  have  almost  entirely 
disappeared  from  circulation  with  the  excep- 
tion of  the  silver  coins  used  in  retail  trade, 
and  these  are  merely  tokens  and  are  worth  as 
bullion  only  about  one-half  their  nominal  value. 
The  same  is  true  of  the  nickel  five  cent  pieces 
and  the  copper  cents.  These  coins  are  used 
merely  as  counters. 

With  the  elimination  of  gold  coins  the  last 
vestige  of  commodity  money  will  have  finally 


182  THE   EVOLUTION    OF   BANKING 

disappeared,  at  least  so  far  as  America  is  con- 
cerned. 

Any  commodity  which  fluctuates  in  value 
either  from  the  effect  of  a  diminishing  or  in- 
creasing supply,  or  from  the  increase  or  de- 
crease in  the  cost  of  production,  is  a  poor 
instrument  by  which  to  measure  the  relative 
exchange  value  of  other  commodities  with  itself 
or  with  each  other. 

The  labor  time  necessary  to  produce  an 
article  will  ultimately  be  the  standard  by  which 
its  exchange  value  will  be  estimated. 

Any  financial  legislation  in  the  future  must 
be  based  on  a  full  knowledge  of  the  history  of 
money  and  banking.  It  must  be  in  harmony 
with  the  evolutionary  tendencies  ascertained  by 
a  study  of  their  development.  Society  must  be 
protected  from  disastrous  results,  such  as  were 
caused  by  errors  in  the  past,  so  far  as  human 
intelligence  can  be  depended  upon. 

Some  day  society  will  take  the  place  of  the 
capitalist  as  the  organizer  and  director  of  in- 
dustry, and  then  production  can  and  will  be 
carried  on  for  use  and  not  for  profit. 

Constructive  financial  legislation  can  be  in- 
augurated now  which  will  hasten  the  day  when 
the  exploitation  of  the  working  class  will  cease 
and  make  the  change  from  private  ownership 


THE   EVOLUTION    OF   BANKING  183 

of  the  means  of  life  to  collective  ownership  easy 
and  frictionless. 

To  gain  this  desirable  end  by  a  gradual 
process,  it  will  be  necessary  for  the  United 
States  government  to  expand  the  functions  of 
the  Treasury  Department  and  the  Postal  Sav- 
ings Bank  and  through  them  supply  money  and 
credit  to  public  bodies,  in  such  amounts  and 
under  such  conditions  as  will  enable  public 
works  to  be  inaugurated  without  the  aid  of 
private  capital  or  credit. 

With  the  machinery  of  credit  in  the  hands 
of  the  people,  no  more  interest-bearing  bonds 
need  be  issued  and  the  burden  of  interest  would 
be  removed. 

There  have  been  issued  during  the  past  ten 
years  $3,500,000,000  in  municipal  obligations 
and  about  $2,500,000,000  during  the  previous 
ten  years,  some  of  which  have  matured. 

There  are  probably  now  $5,000,000,000  of 
these  bonds  still  outstanding  in  addition  to  the 
$1,146,626,000  United  States  government  bonds. 
This  calls  for  at  least  $250,000,000  yearly  for 
interest.  During  the  year  1913  $403,000,000 
and  in  1914  $474,000,000  were  marketed.  The 
first  four  months  of  the  present  year  saw  an 
additional  $148,128,400  added  to  the  amount 
outstanding. 


184  THE   EVOLUTION    OP   BANKING 

The  amount  of  credit  borrowed  through  the 
use  of  bonds  by  states,  counties,  cities,  school 
boards,  and  road,  bridge,  and  drainage  com- 
missioners approaches  $500,000,000  a  year. 
This  means  an  additional  charge  for  interest 
each  year  of  $25,000,000.  The  interest  now 
paid  on  the  outstanding  municipal  and  govern- 
ment bonds  is  equivalent  to  the  average  yearly 
wages  of  nearly  500,000  workers. 

This  can  be  saved  by  proper  legislation  along 
the  following  lines : 

The  Postal  Savings  Bank  law  should  be 
amended  to  permit  the  opening  of  checking 
accounts  by  individuals,  firms,  corporations  or 
public  officers,  and  the  limitations  on  the 
amount  which  may  be  on  deposit  to  the  credit 
of  any  one  removed. 

Postal  Savings  Banks  should  be  located  in 
convenient  places  easily  reached  by  the  public, 
with  as  many  branches  as  may  be  needed  in  any 
city  or  town,  and  a  campaign  of  publicity  be 
inaugurated,  with  a  view  to  bringing  the  use 
of  the  Postal  Savings  Bank  to  the  attention  of 
the  people. 

No  deposit  in  a  Postal  Savings  Bank  should 
be  re-deposited  in  any  privately  owned  bank. 

All  sums  to  the  credit  of  the  United  States 
disbursing  officers  should  be  placed  to  their 


THE   EVOLUTION    OF   BANKING  185 

credit  in  the  Postal  Savings  Bank,  to  be 
checked  against  by  them. 

Drafts  should  be  drawn  by  any  Postal  Sav- 
ings Bank  upon  any  other  Postal  Savings  Bank 
within  the  jurisdiction  of  the  United  States  at 
par,  no  charge  being  made  for  exchange  or  for 
services  rendered,  except  what  is  necessary  to 
cover  the  actual  expense  involved. 

No  interest  should  be  paid  on  deposits. 

All  Postal  Savings  Banks  should  become 
members  of  the  local  Clearing  House  Associa- 
tion. 

In  addition  to  the  above  a  bill  in  harmony 
with  the  provisions  contained  in  the  one  with 
which  this  volume  closes  should  be  enacted 
into  law. 

"When  the  people  themselves  supply  the 
credit  they  need  for  all  their  present  collective 
activities,  without  the  intervention  of  bond 
syndicates  and  bankers,  they  will  have  learned 
a  most  valuable  lesson  in  finance.  They  can 
then  go  on  adding  one  enterprise  after  another 
as  fast  as  the  growing  intelligence  of  the  voters 
demand. 

The  money  or  credit  issued  to  establish  or 
purchase  income-producing  enterprises  could 
be  redeemed  out  of  the  surplus  revenues,  and 
after    the    debt    created    had   been    paid    the 


186  THE   EVOLUTION    OF   BANKING 

charges  for  service  could  then  be  reduced  and 
labor  conditions  improved. 

Where  the  credit  had  been  given  to  aid 
in  establishing  non-income-producing  improve- 
ments, such  as  parks,  roads,  schools,  etc.,  4  or  5 
per  cent  of  the  principal  amount  could  be 
redeemed  each  year  out  of  the  general  tax  levy 
until  the  debt  was  cancelled. 

The  credit  advanced  could  be  either  in  the 
form  of  a  credit  entered  on  the  ledger  of  a 
Postal  Bank,  and  transferred  by  checks,  or  in 
the  form  of  United  States  notes  for  purposes 
of  circulation. 


A  BILL  to  Provide  a  Self-Redeeming"  Legal 
Tender  Paper  Currency,  at  Cost,  for  All  Pub- 
lic Functions  and  for  the  General  Use  of  the 
People  of  the  United  States  of  America. 

FORMULATED  BY  W.  W.  CLAY  OF  CHICAGO. 

(a)    fiscal  department: 
Be  It  Enacted  by  the  Senate  and  House  of  Repre- 
sentatives  of   the    United  States   of  America  in 
Congress  Assembled: 

That  within  ninety  days  after  the  passage  of  this 
act,  the  Government  of  the  United  States  shall  estab- 
lish a  Fiscal  Department,  under  the  jurisdiction  of 
its  Treasury  Department,  with  all  clerical  or  other 
machinery  that  may  be  necessary  to  transact  its 
business,  and  with  proper  and  sufficient  appropria- 
tion of  funds  to  maintain  the  same. 

The  Fiscal  Department  of  the  United  States  shall 
be  in  the  nature  of  a  Bank  of  Issue  and  its  pur- 
pose shall  be  to  provide  Money  for  the  Public  Needs 
of  the  People  of  the  United  States,  and  to  Unify 
All  Forms  of  Currency  now  in  circulation  by  the 
authority  of  the  United  States  (except  Federal  Re- 
serve Currency). 

(b)  nature  of  united  states  money: 

All  Money  Issues  of  the  Fiscal  Department  shall 
be  in  Paper  Currency,  which  shall  be  printed  by 
the  Bureau  of  Printing  and  Engraving,  and  prop- 
erly attested. 

This  Currency  Shall  Be  Lawful  Money  of  the 
United  States,  and  Shall  Be  Called  United  States 
Currency. 

It  shall  be  in  general  form  and  design  similar  to 
the  present  United  States  Notes,  and  it  shall  be 
issued   in   denominations   that   may,   from   time   to 

187 


188  THE    EVOLUTION   OF   BANKING 


time,  seem  best  suited  to  the  needs  of  the  People 
of  the  United  States. 

United  States  Currency  Shall  Be  an  Evidence  of 
Monetary  Credit  in  the  Person  of  Lawful  Holders, 
and  Shall  Be  Receivable  at  Face  Value  in  Liquida- 
tion of  All  Debts  and  Dues,  Public  and  Private 
(Without  Exception),  Within  the  Territorial  Juris- 
diction of  the  United  States. 

(C)     UNIFICATION    THRU    LEGALTENDERIZING: 

For  the  Purpose  of  Unification,  from  and  after 
the  passage  of  this  Act,  all  United  States  Notes, 
National  (banknote)  Cuirency,  Gold  certificates,  and 
Silver  certificates  shall  be  Full  Legal  Tender  for  all 
debts  and  dues.  Public  and  Private,  Without  Ex- 
ception, thruout  the  territorial  jurisdiction  of  the 
t/wiied  jSia^es,  and  except  National  (Banknote)  Cur- 
rency, Shall  Be  Available  as  Reserves  in  National 
Banks:  But  while  in  circulation,  each  particular 
kind  aforesaid,  shall  preserve  all  the  qualifications 
it  now  possesses,  in  regard  to  redemption  in  such 
other  forms  of  Money,  as  Gold  or  Silver,  which  the 
conditions  on  its  face,  or  the  present  laws  of  the 
land,  provide. 

(d)  unification  thru  exchange: 

All  such  various  notes  "currency"  or  "certificates" 
that  now  are,  or  that  hereafter  may  be  possessed 
or  collected  by  the  United  States,  thru  its  treasury, 
sub-treasuries,  post  offices,  custom  houses,  or  any 
and  all  other  receiving  departments  of  the  United 
States,  together  with  all  gold  coin,  shall  be  immedi- 
ately sent  to  the  Fiscal  Department  of  the  United 
States  Treasury,  and  be  exchanged  for  United  States 
Currency  of  equal  sums  and  approximately  corre- 
sponding denominations. 

Any  banks,  corporations  or  individuals  having 
such  notes,  currency  or  certificates  may  have  them 
exchanged  for  United  States  Currency  on  applica- 
tion to  the  Fiscal  Department. 

The  Owner  of  any  mutilated  or  wornout  Notes, 


THE   EVOLUTION   OF  BANKING  189 

Currency,  or  Certificates,  may  also  have  them  ex- 
changed for  United  States  Currency  in  like  manner. 

No  such  "notes,"  "currency"  or  "certificates"  when 
so  collected  or  exchanged  shall  be  re-issued  or  paid 
out  by  the  Government  of  the  United  States  or  any 
of  its  Departments,  and  all  present  laws  for  re- 
issuing or  re-circulating  of  same  are  hereby  repealed 
and  declared  null  and  void. 

All  such  Notes,  or  Certificates,  in  any  manner 
received  or  exchanged  for,  thru  the  operation  of  this 
Act,  Shall  at  Once  Be  Destroyed. 

All  National  (banknote)  Currency  shall  be  held 
for  the  redemption  of  the  U.  S.  Bonds  against  which 
they  were  issued. 

(E)    CURRENCY   FOR   GOVERNMENT   PURPOSES: 

United  States  Currency  shall  furthermore  be  cre- 
ated for,  and  issued  into  circulation,  by  the  various 
departments  of  Government,  for  all  Public  Purposes 
that  require,  or  may  require,  expenditure  of  Public 
funds,  and  for  which  appropriations  may  be  made. 
The  same  being  provided  by  the  Fiscal  Department 
as  earned  and  needed. 

All  such  new  United  States  Currency -must  first 
go  into  circulation  by  being  earned  for  full  value 
received  in  the  performance  of  Public  Functions, 
and  when  returned  thru  payment  of  services  by  the 
Government,  or  thru  Government  revenues,  must  be 
destroyed  as  having  completed  its  cycle. 

(F)     TO    PREVENT    POSSIBLE    REDUNDANCY: 

Return  demands  on  money  issued  for  Government 
purposes  shall  be  made  and  arranged  thru  the  usual 
channels  for  Government  Revenues,  so  that  such 
revenues  shall,  as  nearly  as  possible,  equal  the  out- 
lay. But  in  cases  similar  to  those  now  demanding 
extraordinary  outlay,  and  for  which  the  Government 
has  heretofore  issued  interest-bearing  bonds  to  ob- 
tain funds,  the  revenue  collections  shall  be  at  a 
rate  of  4  per  cent  per  annum  and  continued  until  a 


190  THE   EVOLUTION   OF   BANKING 

sum  equal  to  that  paid  out  shall  have  been  returned, 
and  the  Cycle  of  Any  Issue  Thus  Completed. 
(G)     CURRENCY   FOR    STATES,    ETC.: 

The  Fiscal  Department  of  the  United  States  shall 
also  extend  its  facilities  for  supplying  currency  to 
States,  and  upon  guarantee  of  States,  to  their  re- 
spective Cities,  Towns  or  other  Political  Units, 
whose  ability  to  return  the  same  in  twenty-five  year- 
ly installments  of  4  per  cent  each  is  fairly  demon- 
strated; a  proper  public  use  for  the  money  pro- 
vided ;  the  legal  consent  by  vote  of  the  People  in  such 
political  unit  obtained;  and  a  promise  to  return  the 
currency  advanced  (in  installments  as  above)  prop- 
erly acknowledged  with  suitable  penalties  and  se- 
curities. 

As  the  currency  is  received  back  by  the  Fiscal  De- 
partment in  the  installments  above  provided,  its 
cycle  will  have  been  com^pleted;  and  It  Shall  Be 
Destroyed.  But  these  advances  may  be  paid  back, 
wholly  or  in  part,  in  such  other  forms  of  money 
herein  declared  full  legal  tender  by  this  Act,  which 
shall  be  disposed  of  as  provided  for  such  moneys. 

(H)    CURRENCY  FOR  PURCHASING  PUBLIC  BONDS: 

The  Fiscal  Department  Shall  issue  Currency  and 
the  Treasury  Department  shall  purchase  with  such 
Currency  all  Public  Bonds  Now  Outstanding  That 
May  Be  Offered,  of  the  United  States,  Cities,  or 
Other  Political  Units  that  may  have  met  the  interest 
provided  by  their  respective  bonds.  These  bonds  to 
be  paid  for  at  par,  plus  accrued  interest.  The  Treas- 
ury Department  shall  collect  the  interest  on  such 
bonds  and  destroy  or  otherwise  dispose  of  the  money 
paid  in,  as  provided  for  such  moneys. 

When  the  bonds  so  purchased  become  due,  and  all 
interest  requirements  have  been  satisfied,  the  Po- 
litical Unit  involved  may  redeem  or  renew  the  same 
on  the  4  per  cent  yearly  installment  plan  provided 
for  the  payment  of  political  unit  obligations  set 
forth  in  Section  G. 

For  any  bonds  of  political  units  not  purchased  un- 


THE   EVOLUTION    OF   BANKING  191 

der  this  clause,  the  Fiscal  Department  may  provide 
currency  for  the  payment  thereof  under  the  gen- 
eral provisions  of  Section  G  if  the  same  is  accept- 
able to  the  several  holders  of  such  bonds ;  not  exceed- 
ing par  value. 

(i)    finally: 

Nothing  in  this  Bill  Contained  Shall  Be  Construed 
into  a  Repudiation  or  Revocation  of  the  Rights  of 
Redemption  in  Gold  or  Silver  Coin,  as  the  Case  May 
Be,  of  Any  hjotv  Existing  Form  of  Money  or  Other 
Obligations,  Thru  Which  Lawful  Demands  May  at 
Present  Be  Made  for  Such  Gold  or  Silver  Coin. 


192  TtlE   EVOLUTION    OF   BANKING 


BIBLIOGRAPHY. 

The  following  list  of  works  is,  of  course,  not  in- 
tended as  a  complete  bibliography  of  the  subject, 
but  merely  indicates  the  principal  sources  from 
which  the  information  in  this  book  has  been  com- 
piled: 

Assignats  and  Mandats,  Stephen  D.  Dillaye. 

Banking  Systems  of  the  World,  William  Matthews 
Handy. 

Communist  Manifesto,  The,  Karl  Marx  and  Fred- 
erick Engels. 

Critique  of  Political  Economy,  A,  Karl  Marx. 

Currency  and  Banking,  Bonamy  Price. 

Example  of  Communal  Currency,  An,  J.  Theodore 
Harris. 

French  Eevolution,  The,  Carlyle. 

High  Cost  of  Living,  The,  Karl  Kautsky. 

History  of  American  Currency,  Wm.  G.  Sumner. 

Inaugural  Address  as  President  of  Institute  of 
Bankers,  London,  Sir  John  Lubbock. 

Modern  Banks  of  Issue,  Charles  A.  Conant. 

Money  and  Its  Substitutes,  Horace  White. 

Money  and  Social  Problems,  J.  Wilson  Harper. 

Money  and  the  Mechanism  of  Exchange,  W.  Stan- 
ley Jevons. 

Money  of  the  New  Conscience,  Henry  Demarest 
Lloyd. 

Our  Money  Wars,  Samuel  Leavitt. 

Paper  Money  Inflation  in  France,  Andrew  D. 
White. 

Recent  Economic  Changes,  D.  A.  Wells. 

Science  of  Wealth,  The,  Amasa  Walker. 

Theory  and  Practice  of  Banking,  Henry  Dunning 
McLeod. 

Ways  and  Means  of  Payment,  Stephen  Colwell. 


AA    001  120  648    9 


